Is the Public Company Accounting Oversight Board Unconstitutional?


That question is on the docket for the Supreme Court in October. The Court agreed to rule on the constitutionality of the Public Company Accounting Oversight Board in Free Enterprise Fund v. PCAOB (08-861). The Sarbanes-Oxley Act passed in 2002 created PCAOB as a new government agency to regulate firms that audit the books of publicly traded companies. The key question in the case is whether the Act violated the separation-of-powers doctrine.

This amici brief from a group of law professors says: No, its unconstitutional.

As law professors who have studied and written about the massive accounting and corporate governance scandals that prompted the passage of the Act, we applauded Congress’s decision to establish a new independent regulator to oversee the conduct of the auditors of public companies. We have been concerned, however, that the particular design chosen by Congress accorded the PCAOB substantial discretion and autonomy without imposing constitutionally sufficient accountability. The current economic crisis in the financial markets has raised for us another concern: that Congress may use the design of the PCAOB in creating additional independent financial regulators. Ultimately, we hope that a decision by this Court will prompt Congress to restructure the PCAOB as a regulator that is more accountable and transparent.

The professors in the brief are: Stephen Bainbridge, Robert Bartlett, William Birdthistle, Timothy Canova, Lawrence Cunningham, James Fanto, Theresa Gabaldon, Lyman Johnson, Roberta Karmel, Donna Nagy, Lydie Pierre-Louis, Adam Pritchard, Margaret Sachs, Gordon Smith, and Kellye Testy.

The Cato Institute and law professors Larry Ribstein and Henry Butler came to the same conclusion.

Historically, the power to remove an official “for cause” was seen as “an impediment to, not an effective grant of, Presidential control.” Morrison v. Olson, 487 U.S. 654, 706 (1988) (Scalia, J., dissenting). But at least traditional independent agencies are subject to this control. That much is settled. Here, the Board is protected from Presidential control by two layers of “for cause” removal statutes—rendering removal effectively impossible.

Also lining up against PCAOB are The Washington Legal Foundation, Mountain States Legal Foundation and American Civil Rights Union.