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The Recession Spectator
Peekaboo! I See You…Acting Unconstitutionally
The Supreme Court will soon rule on a case that could bring much needed relief to small businesses.
During the next two weeks, the Supreme Court will rule on a case that, if decided correctly, will bring relief to small businesses all over the nation. The details of the case sound arcane, but they get to the heart of how America is governed and what the Founders intended. Should the Justices uphold a challenge to the constitutionality of the Public Company Accounting Oversight Board (PCAOB, often pronounced “Peekaboo”), then entrepreneurs, the Constitution, and the rule of law will win. The losers? Beancounters and bureaucrats.
Facing public anger after the demise of Enron, Congress rushed to pass the Sarbanes-Oxley Act (known as Sarbox), which imposed a ton of new paperwork on businesses in the name of preventing another Enron-like scandal and subsequent bankruptcy. Ironically, many of the new requirements were already present at Enron, and the main beneficiaries of Sarbox were the Big Five accounting firms.
To oversee this huge exercise in ineffective check-box regulation, Sarbanes-Oxley set up a new bureaucracy, the PCAOB. Peekaboo has vast powers, including the ability to fine companies up to $2 million for even inadvertent breaches of its rules, which can go into absurd detail. Auditors must, for example, rule on which low-level employees have access to computer passwords.
Peekaboo’s clunking fist has fallen the most heavily on small businesses, which find compliance harder. Big businesses, which are the big accounting firms’ main clients, are able to absorb the large cost of the accounting requirements. Small accounting firms that specialized in helping small clients are unable to cope with the workload and are going out of business. A University of Rochester researcher has calculated that Sarbox has hammered the economy with over $1.4 trillion in direct and indirect costs.
Moreover, Sarbox has kept companies from growing. Company flotations by IPO have almost dried up owing to the added costs of going public which Sarbox imposes. This has constrained businesses’ ability to raise equity financing at a time when debt financing is hard to get. In other words, the PCAOB has been a little-noticed exacerbating factor in the current recession.
The economic damage from Sarbox is bad enough. But the damage doesn’t end there. This hastily enacted legislation has also done the U.S. Constitution wrong.
PCAOB’s board members are appointed by the Securities and Exchange Commission and enjoy salaries commensurate with their enormous power — and are even paid more than the president. Yet according to that inconvenient document, the Constitution, federal officers are supposed to be appointed by the president and confirmed by the Senate. (The Appointments Clause gives Congress the power to have junior officers appointed by other means, but the courts have held that this is a very limited power, restricted to appointments with limited authority.)
The PCAOB claims it is a private corporation by statute, but again the courts have rejected this sort of temporizing, holding nominally private corporations such as Amtrak to be de facto government agencies, subject to the requirements of the Constitution.
Given Peekaboo’s powers to punish citizens, safeguards against potential abuses are vitally important. The Appointments Clause requires a thorough background check of nominated individuals, ensures that the president is held accountable for his officers’ actions, and insulates the position from the influence of special interests. The current PCAOB appointment process has none of those safeguards.
For the reasons stated above, the Competitive Enterprise Institute, the Free Enterprise Fund, and a small accounting firm whose business was ruined by the new regulations have challenged the constitutionality of the Board. They have also asked the Court to block the Board from creating any new regulations.
If the Court upholds the challenge, business will be given a deregulatory stimulus at a time when they need it most. Congress will be forced to rethink corporate governance and, rather than hand it off to an unconstitutional agency, might actually take some difficult decisions. For example, it could empower shareholders by pre-empting state laws that prevent them from getting rid of incompetent or unscrupulous managers.
Small businesses everywhere are crying out for some freedom from the PCAOB’s bureaucratic tentacles. If the Supreme Court rules this octopus unconstitutional, it will be a victory for freedom in the spirit of the Founding Fathers — and for the Constitution itself.
About the Author
Iain Murray heads the Center for Economic Freedom at the Competitive Enterprise Institute and is the author of Stealing You Blind: How Government Fatcats Are Getting Rich Off of You.
Letter to the Editor View all comments (21) | Leave a comment
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Rebecca| 6.7.10 @ 8:06AM
I hope the ruling comes down favorably for small business. I worked for a small cap company who's comptroller spent a good part of his time complying with SEC requirements, not to mention the cost. For a small company with a stock that didn't move much, the end result was to go private.
Larger companies already create internal controls to moniter and prevent fraud by employees. And you still get embezzlers and rule breakers that cost money. I worked in a corporate office where the department I was in created several reports to be filled out weekly concerning the status of capital investment. Other departments also wanted reports as well as the training and sales departments set higher targets. The front line worker is where a lot of the breakdown occurs because while you may only request a 10 minute report, others are also. Eventually you put this worker in the dilema of taking care of corporate or the customer.
It is also what is happening in the medical field. Nurses are spending more time with blackberries, and filling out reports than observing and caring for patients. A nurse I know said that since they had to start filling out more frequent fall assessments on patients, falls have gone up, probably because they are so busy filling out reports, they aren't helping people.
The government has become a corporate office, or are trying to manage the country/economy like one. Well, I got news, even our small company could not prevent fraud.
Bill Hussein O'Stalin| 6.7.10 @ 8:10AM
Another perfect example of failed central economic planning.
Shamus| 6.7.10 @ 8:14AM
The Constitution says whatever nine judges say it does. Through the years the court has said you can own a slave (Dred Scott) but you can't own a home (Kelo). Freaks like Elena Kagan have the power to take away our rights and they're not afraid to use it.
Ken (Old Texican)| 6.7.10 @ 10:54AM
Rebecca,
Iain,
Thank you. I got caught up in taking our small cap company "fully reporting", and we were crushed under the burden, financially and in terms of effort on our managers' part.
Sarbox is one of the biggest scams ever foisted on American business.
When a stockholder gets one of those "full reports", unless he or she is an SEC accountant with all current "rules and definitions" in mind, he or she has not a chance to understand the underlying realities of the company.
It is ALL a waste....except to employ accountants, the same as our tax returns.
Curly Smith| 6.7.10 @ 11:02AM
Let me clarify something, its "The Sarbanes–Oxley Act of 2002". You might recall "The Bipartisan Campaign Reform Act of 2002". 2002 was a big year for unconstitutional legislation passed by Republican majorities in both Houses and signed by the Republican President. You might also recall the rise of the "Porkbusters" and the revolt over "The Comprehensive Immigration Reform Act of 2007", both precursors to the Tea Parties.
I've said this before, shouldn't we, as Conservatives, demand that the prospective Republican majority tell us what it intends to do with all of the power that may land in their laps in November? Is it really enough to say "yeah, but the Democrats would have been even more unconstitutional"?
If you listened to Rush last week then you heard Paul Ryan saying that the Republicans need an agenda beyond "just saying no". I'd argue that they haven't been the "Party of No" as much as they've been the Party of “We're not the Democrats" (much like the Dems in 2006 and 2008 were the Party of “We're not the GOP"). Most of you would agree that the electorate should have forced the Democrats to detail their agenda prior to the "Immaculation". Shouldn’t the same hold true for the GOP? Wouldn’t it behoove us as Conservatives to know if the party we’re sweeping into power is the Republican Party that we *want* it to be or if it’s the Republican Party that it’s *demonstrated* itself to be?
Our vote is the only power that we have and that power only exists for a fleeting moment in time. If we don’t get answers before the election then we truly deserve the legislation that follows.
Jeff Perren | 6.7.10 @ 11:35AM
Excellent article.
Sarbox was always a bad idea economically. But there is an even more heinous principle at work that the author doesn't discuss. Why should the law treat 'private' businesses differently from corporations? Why should issuing 'public' stock make one subject to additional requirements, nor allow those that don't freer rein?
The whole idea is shot through with contradictions. The SEC should be eliminated.
ned| 6.7.10 @ 1:00PM
the reason they are treated differently is in the descriptors "public" versus "private"... if I have "public" money in my company I must follow specific rules on how I disclose what I do with that money... if I use only "private" money, it's none of the SECs damn business... or anyone else's except those that provide the "private" money... those people are called "owners", not "stockholders"....
Ken (Old Texican)| 6.7.10 @ 5:00PM
ned,
Please forgive me, but I divided my share owners into two "artificial" groups I suppose.
1. "stockowners"who actually invested money in the company.
and
2. Those who simply used our public stock as a "speculative" vehicle.
In both their cases, I established an "open door policy". ie: I did news releases and invited any shareholder-owners to call me with specific questions. Heh, they call all the time.
Best regards
Purpleguy| 6.7.10 @ 6:33PM
Although I don't disagree with the premise that small business could always use some relief, the law doesn't specifically target small businesses. In fact, it is their dealings with the Fortune 1000 companies that have to prove their associations with their suppliers that causes the small business to be involved at all. And from the Big Business point of view, the law is needed. The principle that in their own self-interest businesses will regulate themselves is a falsity.
Case in point, the Oil industry and Wall Street. We have perfect examples of the exaggerated claims that BP could manage this and larger oil spills, if they were even to happen, which of course they couldn't because of all the so-called fail-safe mechanisms. That ship has obviously sailed.
And, need we say more about Wall Street's inability to police itself?
Sarbanes-Oxley was an attempt by the Government to hold the Officers of a public company liable for any financial filings and holding those responsible for their word that said so much money was made doing such and such and this is the financial position of the company. In addition, it was meant to shore up investor confidence which had been shaken after the Enron debacle followed by WorldCom and Tyco International.
From that perspective, it has worked ... but what price security? Liberty vs. security - the struggle has ever been and will ever be. Striking the right balance is necessary, but throwing all support to one and not the other will surely never be the answer. Think about this : In Nazi Germany, security was absolute (except the State itself of course) and in Somalia Liberty is absolute. Do you really want to live in either place during their time?
Tom| 6.7.10 @ 10:13PM
I would disagree with your assertion that liberty in Somalia is absolute. I doubt it exists for most people at all. Those who make rules, thus restricting liberty, are those who control the most guns. For those without guns there is little liberty at all.
Don'tHoldYourBreath| 6.7.10 @ 8:47PM
It is very likely that the PCAOB will be deemed unconstitutional. But for those of you with champagne on ice, don't get too excited. The PCAOB isn't going anywhere.
Despite the desire on the right for a sweeping decision to eliminate the PCAOB, SOX and all independent agencies, SCOTUS will decide this case on very narrow (and easily fixable) grounds. In fact, the most likely line of reasoning would say the PCAOB is unconstitutionaly because the members of the board can't be removed at will by the SEC. That could be fixed in a one sentence rider in a 2011 appropriations bill. And since all of the PCAOB's activities to date have been expressly approved by the SEC, there is no fear that finding the board (temporarily) unconstitutional will lead to any uncertainty as to the legality of their decisions. PCAOB actions, as ratified by the SEC, will remain in effect- including SOX 404 and AS 5.
Finally, for those small cap companies complaining about high costs of compliance, I have no sympathy. You have obligations to public shareholders and ensuring you have reasonable controls over your finances shouldn't be too much to ask. For gosh's sakes, the internal control requirement is over 30 years old. (See the Foreign Corrupt Practices Act of 1978.) SOX merely requires you prove that they work (assuming you had them to begin with). If you don't want to comply with reasonable regulatory requirements, go private.
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