A free-market advocacy group has filed a lawsuit that challenges the legal authority of the Public Company Accounting Oversight Board to police the accounting profession.
The Free Enterprise Fund asserted in a press release that the Sarbanes-Oxley Act of 2002 — the landmark legislation that created the PCAOB — “was rushed into law” with legitimate intentions but “ultimately has produced costly unintended consequences for publicly traded U.S. businesses, entrepreneurs, and capital markets.”
The group cited a recent University of Rochester study that found that Sarbox has sliced the total stock market value of American companies by $1.4 trillion.
“It is now clear that the costly regulatory burdens imposed by this legislation absolutely outweigh its benefits,” said Mallory Factor, chairman of the Free Enterprise Fund. “The PCAOB and the Sarbanes-Oxley Act raise unconstitutional barriers to needed liquidity, discourage entrepreneurship and innovation, and hinder U.S. competitiveness by denying access to needed capital. Further, the high cost of compliance that disproportionately affects smaller public companies is having long-term, exponential negative implications for our economy.”
Michael Carvin, a partner at Jones Day and the group’s outside legal counsel, asserted in a statement that the PCAOB violates separation-of-powers principles because the board performs an executive function, yet neither the president nor any entity within the executive branch was given authority to appoint or remove board members. “In brief, the PCAOB is not accountable to any elected official or the citizens subject to PCAOB regulation,” he added.
Joining the efforts to argue against Sarbanes-Oxley are Kenneth Starr of Pepperdine University; who presided over the Monica Lewinsky case; Viet D. Dinh of Georgetown University, a former U.S. assistant attorney general; and Hans Bader, counsel to the Competitive Enterprise Institute, a libertarian think tank.
Specifically, the organization argues that the PCAOB violates the appointments clause (Article II, Section 2) of the U.S. Constitution. “PCAOB members wield significant regulatory powers that bring them squarely within the meaning of Article II and should be appointed by the President with the ‘advice and consent’ of the senate, not the SEC,” stated the press release.
The two originating plaintiffs in the lawsuit against the PCAOB are the Free Enterprise Fund and the accounting firm Beckstead and Watts LLP, based in Henderson, Nevada. “Our accounting firm has served a very important segment of the public market, yet we are a casualty of a government agency run amok,” said managing partner Brad Beckstead. “We can no longer serve the needs of small publicly traded companies while continually having to focus our time and monetary resources answering to the incessant demands of an unaccountable PCAOB. The ultimate consequence of the PCAOB actions will be to put small public companies out of business, force them to de-list, or take their public offerings offshore to Europe and Asia.”
Factor argued in the press release that the goals of solid internal controls and transparent financial reporting are better achieved through the free market rather than from regulation. “Enforcement efforts should focus on aggressive prosecution of bad actors under existing anti-fraud laws rather than imposing costly and largely ineffective procedural requirements on all public companies,” he added.