Nearly five years ago, CEI and accountant Brad Beckstead began to discuss mounting a constitutional challenge to Sarbanes-Oxley’s Public Company Accounting Oversight Board (PCAOB). The PCAOB’s rules under Sarbanes-Oxley were strangling Beckstead’s two-person firm in Henderson, Nev. — and the small public companies he served — in reams of red tape, the bulk of which provided little value for shareholders.
Today, with the assistance of CEI attorneys Kazman and Bader, and led by Michael Carvin of Jones Day, plaintiffs Beckstead and the Free Enterprise Fund beat the proverbial Goliath. The Supreme Court struck down key provisions of the PCAOB as unconstitutional, on separation of powers grounds. A majority of justices agreed that the current structure of the PCAOB fails to adhere to constitutional provisions governing removal of important officers. These provisions are designed to ensure that government agencies are accountable to elected officials — and ultimately to the American people.
The board’s lack of accountability under the Constitution is reflected in its flawed rules. For example, the board’s “internal control” mandate costs companies $35 billion a year and has auditors going over trivial minutiae such as the possession of office keys and the number of letters in employee passwords. Meanwhile, in the nearly eight years of its existence since Sarbanes-Oxley was passed in 2002, the PCAOB has done little to address auditing rules for off-balance-sheet entities like those at the core of Enron’s accounting problems and those used to hide debt at Lehman and other financial firms.
The shortcomings of the PCAOB and Sarbanes-Oxley have been recognized by members of both parties. For instance, the House-Senate conference for the pending financial-regulation bill agreed to accept a measure permanently exempting smaller public companies from the PCAOB’s internal-control mandates.
The PCAOB’s mandates and possibly other sections of Sarbanes-Oxley may now be subject to legal challenge. We look forward to working through the courts and/or Congress to correct the flawed rules of an unconstitutional body that have been holding our economy back.
– John Berlau is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute.