The Securities and Exchange Commission and the Department of Justice formally supported the constitutionality of the Public Company Accounting Oversight Board with the filing of a 46-page legal brief just before Labor Day.The brief outlined the government's arguments in support of the PCAOB's constitutionality, and was submitted in the U.S. District Court for the District of Columbia in a case brought by the Free Enterprise Fund in February.
Joined by small Las Vegas auditing firm Beckstead and Watts LLP, the anti-tax think tank has argued that the board's structure violates the appointments clause of the U.S. Constitution. The five-member board is selected by the unanimous approval of the SEC, not by either the president - which would require Senate approval - or by the courts or a department head of an agency. Secondly, the complaint accuses the PCAOB of taking away authority reserved for the executive branch of government.
Following the 2002 passage of the Sarbanes-Oxley Act, the PCAOB was established as a private, nonprofit entity, which is funded not by taxpayers, but rather by corporate fees, with the members selected by the SEC - the plaintiff's primary point of contention.
The plaintiffs claim that the appointments clause requires senior federal officials to be named by the president and confirmed by the Senate, while the president, the courts or a department head may pick "lesser officers."
However, the government brief argued that the SEC's "pervasive oversight authority leaves no doubt of the existence of a 'superior/inferior' relationship," to meet the intentions of the appointments clause, and flatly dismisses the separation-of-powers concerns.
The final point refuted in the brief is the point raised by the think tank and the firm that Congress must provide an "intelligible principle" to confer discretionary authority to the PCAOB. The brief states that the Supreme Court has found the principle to be lacking on only two occasions, both decided more than 70 years ago.
Last year, Beckstead and Watts received a critical inspection report from the oversight board, which examined some 16 audits performed by the firm. Of that number, which were largely audits of micro-cap and development company clients, PCAOB auditors identified "deficiencies of such significance that it appeared to the inspection team that the firm did not obtain sufficient competent evidential matter to support its opinion on the issuers' financial statements."
At the time, Beckstead and Watts said that investors usually understand the high risk they take with any of the companies in the niche market, and also said that the majority of the audit clients that had going-concerns listed on their audit reports were now facing significant non-operating losses.
The brief is available at www.sec.gov/news/extra/2006/2006-147_brief.pdf.
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