The fact that the Securities and Exchange Commission last week filed a 46-page legal brief supporting the constitutionality of the Public Company Accounting Oversight Board to me was not as surprising as the fact they had to do it at all.
The brief was in response to litigation brought by the Free Enterprise Fund, a Washington D.C.-based think tank, which argued that the structure of the audit oversight body violated the appointments clause of the Constitution.
I won't go into the minutiae of the complaint, which has been covered extensively in our publications as well as others, but in essence, its stance is that the PCAOB's five-member board is chosen not by the president -- which would require approval from lawmakers -- or by the courts. It also argues that the PCAOB usurps the authority of the government's executive branch.
The commission's response was that its oversight authority over the PCAOB is structured via a "'superior/inferior' relationship, which meets the intentions of the appointment clause and is not a separation of powers.
Not to mimic the ageless Paul Harvey, but now ... the rest of the story.
Joining the Free Enterprise Fund in the complaint is Beckstead and Watts LLP, a small CPA firm in the Las Vegas area. And while the plaintiffs have stated that other auditing firms may later join the suit, Beckstead and Watts isn't exactly a charter member of the PCAOB fan club, nor does it have reason to be.
In a report released in September 2005, PCAOB auditors examined 16 of the firm's 61 public client audits and, in eight of them -- primarily micro-cap and development companies -- identified a host of audit deficiencies.
That's not to infer that the suit is simply sour grapes or backlash over getting an F on an audit report card.
No, the larger implication of this legal mélange is a not-so-subtle effort to begin stripping away layers of Sarbanes-Oxley -- particularly Section 404. This despite the fact that the SEC, while pushing back the dates for 404 compliance for smaller filers, has stated in no uncertain terms that SOX is basically here for the duration.
The SEC currently has a pretty full plate performing the duties it was founded 70 years ago to perform. It's absurd to have to spend time answering a legal challenge to one of its reporting entities, and in broader terms, defending a reform act that probably came two decades too late.
And don't take my word for it.
Just ask an Enron or WorldCom investor. I'm quite certain their defense of the PCAOB or SOX wouldn't require 46 pages of legalese, and their language would surely be more colorful.
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