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.
