More than three years after its passage, and months after the largest players in the auditing field have had to face the new meaning of internal controls, the centerpiece of the Sarbanes-Oxley Act -- the creation of the Public Company Accounting Oversight Board -- looks to be facing a court battle that carries some weight.
The Competitiveness Enterprise Institute, a Washington, D.C.-based libertarian think tank and the anti-tax group the Free Enterprise Fund are expected to file papers as soon as today, arguing that the method of filling the five-member PCAOB's seats violates the Constitution.
A CEI white paper, written by Hans Bader, counsel for special projects at the institute, and John Berlau, a fellow in economic policy at the institute, is expected to form the basis for much of the case. In the October 2005 report entitled, "The Public Company Accounting Oversight Board: An Unconstitutional Assault on Government Accountability," the men wrote that the appointments clause requires senior federal officials to be named by the President and confirmed by the U.S. Senate, while the president, the courts or a department head may pick lesser officers.
W hen Congress created the five-member PCAOB in 2002, it established the board as a private, nonprofit corporation funded by corporate fees, leaving the appointment of board members to the Securities and Exchange Commission. The men argued in their paper that the board members should be required to undergo Senate approval, but even if they were to be defined as lower-level officials, the Constitution still doesn't allow for their appointment through the five-member SEC panel.
I'm certainly no scholar of Constitutional law, but it seems the groups have an argument that merits at least their day in court. (On a side note, the paper also cites news accounts of the salaries of the PCAOB's members -- chairman reportedly paid $556,000 in 2003, while other members received $452,000 -- making the point that those salaries hardly seem indicative of "lesser officers.)
But while Constitutional technicality is one thing, the paper's broader assertion, "The appointments clause violation creates a lack of accountability for rules that hurt businesses and don't help investors," seems to be quite another.
The paper opens with a quote from U.S. Senator Phil Gramm (R-Texas), who, in voting for the creation of the board, characterized it as having, "Massive power, unchecked power by design ... We are setting up a board with massive power that is going to make decisions that affect all accountants and every they work for, which directly or indirectly, is every breathing person in the country."
Post-Enron, the need to do something sparked the Congressional action. It comes as little shock that there are many people out there less than enthused about what Sarbanes-Oxley has meant for them and their business -- the paper points to estimates of $35 billion as the costs of SOX implementation, an abstract number often bandied about and describes the circumspect appointments to the board as Congress's way of ducking its responsibility for "the messy and costly rules" it created.
If that was their Congressional intent, it's certainly not the first time politicians ducked getting their fingers dirty, but seems a foolhardy way of establishing an industry regulator. S ince the SEC was created in the 1930s, the commission has overseen a number of self-regulatory organizations, but according to the Government Accountability Office, only once in the mid-1970s did the SEC have appointment power -- and that was only for a temporary municipal bond supervisory board.
Further, it's worth it to note, that even with the board's bongo-bucks salaries, it's been tough work filling up the table. Right now, the five members of the SEC, split between Republicans and Democrats, have to unanimously approve any PCAOB board member. SEC Chairman Christopher Cox has worked to make the process more transparent, but there's little doubt qualified individuals have been deemed non-starters from the start. The search has been ongoing for months for a replacement to former Chairman William McDonough.
Like I said, apparently a good case. On paper. But the question I ask is where's the real world applications of all this?
The court filing surely will read differently from Bader and Berlau's litany of complaints about the law, where the appointment question is showcased as a way of making the law's problematic provisions moot.
In what's sure to be a "messy and costly" court battle, what's the real end game?
Is it requiring the courts to rule the Senate needs to confirm the board's members, and then make the board a government entity, funded by mandatory corporate taxes and completely independent of the SEC?
Are the parties filing the case hoping to tie the matter up in courts for at least a few years reprieve from further enforcement of SOX provision, or is their cause truly more noble?
Constitutional law shouldn't be used as a means to stalling progress.
At the close of Bader and Berlau's paper, they write, "The purpose of the appointments clause is to promote effective management in government by preventing lack of accountability in a multi-member body." They say the clause is about the president, or an agency head, being able to "demand good performance from the appointee."
If that's the case, Congress can make the matter disappear by confronting the problem now, and revamp the PCAOB's structure. It's hard to argue with the call for more accountability from the very board charged with governing accountants.
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