Supreme Court to hear Sarbanes-Oxley challenge

A major government abuse of power is about to get much-needed scrutiny, thanks to the Supreme Court, which this week decided to hear a constitutional challenge to a powerful, unaccountable agency that is a drag on the economy.

 

In the aftermath of the Enron scandal, Congress passed the 2002 Sarbanes-Oxley Act.  It created the Public Company Accounting Oversight Board (PCAOB), and gave it, in the words of a senator who voted for it, “massive power,” “unchecked power by design.”

 

Using that power, the agency created a mountain of red tape that cost the economy over a trillion dollars, according to a joint study by the Brookings Institution and the American Enterprise Institute.

 

And yet, none of the new regulations prevented the subsequent accounting scandals that rocked Wall Street or prevented the problems that brought on the current financial crisis, like faulty reporting of sub-prime mortgage-backed securities

In fact, the agency’s red tape enriched the big accounting firms that failed to warn the public about Enron and similar scandals, enabling them to charge record fees to help businesses comply with regulations.

 

The American Electronics Association estimated yearly compliance costs of $35 billion just for the agency’s “internal controls” rules, which reach trivia like which employee has access to which computer password or office key.

 

The constitutional challenge brought by the Competitive Enterprise Institute and the Free Enterprise Fund argues that the PCAOB is unaccountable and unconstitutional because its members are picked by a group of officials – the members of the Securities and Exchange Commission (SEC) – rather than by the President, with the consent of the Senate.

 

The Appointments Clause of the U.S. Constitution requires that agency officers be picked by the President or (for lesser officers) by the “Head of a Department” – not a group, such as the SEC Commissioners.  The Founding Fathers wanted important government officers, like PCAOB members, to be carefully vetted by the President and Senate. 

 

The PCAOB can impose $2 million penalties for even unintentional violations.  Its importance is reflected in the princely sum its members are paid.  In 2008, PCAOB Chairman Mark Olson received $654,406, and its other members got $531,995, more than the President.  

 

If the Court rules that the PCAOB must adhere to Appointments-Clause checks on government power, it will restore accountability.  If the President can pick and remove the agency’s leaders, he will be on the hook for their failures and thus have an interest in making them develop policies that don’t stifle economic growth.  He won’t be able to blame red tape on an unaccountable agency over which he has no control, the way the President and Congressmen have in the past.  

 

The PCAOB’s defenders cite a 2-to-1 ruling in its favor by the D.C. Circuit Court of Appeals.  But that ruling was based on confused and inconsistent claims about whether the SEC Chairman is or isn’t the SEC’s “Head.” 

 

The appeals court first claimed the SEC’s chairman, despite his title, is “simply one” of “several commissioners” who collectively “head” the SEC, in order to claim that the SEC Commissioners as a group can pick PCAOB members without violating the Appointments Clause.

 

But then it claimed that the Chairman in fact “dominates commission policymaking” in order to reject a separation-of-powers challenge based on the PCAOB’s unaccountability to the President.  (It claimed the President indirectly influences the PCAOB, because he can pick and remove the SEC’s chairman).

 

Such inconsistent reasoning is hard to fathom, in what Judge Kavanaugh’s dissent aptly described as “the most important separation-of-powers case regarding the President’s appointment and removal powers to reach the courts in the last 20 years.” 

 

Hans Bader is Counsel for Special Projects at the Competitive Enterprise Institute and a contributor to OpenMarket.org.