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Sarbox’s Unconstitutional Bureaucracy
Not only is the act regulatory overkill, its oversight board has no political accountability.


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Phil Kerpen

U.S. Federal Reserve Board governor Mark Olson was appointed last week to the highest-paid job in the U.S. government: chairman of the Public Company Accounting Oversight Board (PCAOB). The PCAOB, created by the Sarbanes-Oxley Act of 2002, has the power to set its own budget and salaries, and does not rely on the congressional appropriations process for its budget since it can levy fees on all public companies. The position of the PCAOB chairman, which comes with a hefty salary of $615,000, carries enormous influence over not only the accounting industry, but all publicly traded companies.

 

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Surely an appointment to such a position merits careful consideration by the U.S. Senate, as it offers the president advice and consent. But for some reason the news stories about the Olson appointment did not say he was nominated by the president. Nor did they say that the Senate will hold hearings. No, reports said that he was named PCAOB chair by the Securities and Exchange Commission.

 

There’s something wrong with this picture.

 

The PCAOB exercises governmental powers, therefore its members are officers of the U.S. who must be appointed according to the Appointments Clause of the Constitution: The president must make this appointment, with the advice and consent of the Senate. Because Sarbanes-Oxley establishes that PCAOB members are appointed by the SEC, however, the law violates the Appointments Clause and is unconstitutional.

 

This might seem like a technicality, but it isn’t.  The proper appointments process is crucial to political accountability. Even if Mark Olson is fantastically well-suited to the job, and all indications are that he is qualified and competent, the process through which he was selected did not involve any elected branch of government. Indeed, Olson, like his predecessors and now-fellow board members, is not accountable to any democratically elected branch of government.

 

The PCAOB’s unaccountable, unconstitutional structure is at least partially responsible for the outsized adverse economic impact that “Sarbox” has had on U.S. capital markets. The board’s interpretation of section 404 of Sarbanes-Oxley, which is far more sweeping than the plain language of the statute, requires full external audits of all internal control measures. A significant portion of the adverse economic impact of Sarbox is due to this aggressive interpretation by the PCAOB, which could have been far more reasonable if tempered by the usual political process.

 

These costs are enormous. A new survey released last week by international law firm Foley & Lardner found that since the passage of the law, the average costs of being a public company have increased by $1.8 million — a stunning 174 percent increase. The firm also found that 20 percent of public companies are considering going private to avoid Sarbox ompliance.

 

In 2005, 23 of 24 firms that raised over $1 billion in capital didn’t register in U.S. markets, according to the New York Stock Exchange. Of the 129 companies listed with the London Stock Exchange last year, only 6 listed on the NYSE and 14 on Nasdaq.  Ninety percent of companies that chose London over New York said Sarbox was a factor.

 

The Sarbanes-Oxley Act is an example of extreme regulatory overkill, and one of the main contributing factors is that it creates an unaccountable, unconstitutional bureaucracy. Congress should immediately address this problem by amending the act to both rectify this gross constitutional impropriety and to enact broader substantive reforms to reduce the burden of Sarbox on U.S. businesses and capital markets.

 

— Phil Kerpen is a policy analyst in Washington.



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