SarbOox Showdown

Taking Sarbanes-Oxley to court

The Sarbanes-Oxley Act, passed in 2002, was billed as a way to prevent large-scale frauds like the Enron scandal. In practice, it has done more to frustrate publicly held companies with picayune restrictions on businesses' internal practices. In just its first year of operation, the law imposed $35 billion in compliance costs on American businesses. But relief may be on the horizon: In December, U.S. District Court Judge James Robertson heard arguments in a suit challenging the legitimacy of Sarbanes-Oxley's enforcement body, the Public Company Accounting Oversight Board (PCAOB).

A pro-market research institute, the Free Enterprise Fund, and a small accounting firm, Beckstead and Watts, claim in their suit that the PCAOB violates the Constitution in several ways. First, they argue, the way the body is appointed-by all five members of the Securities and Exchange Commission (SEC) -violates the Appointments Clause. That clause says that all "principal officers" of the government must be appointed by the president and approved by the Senate, appointed by a court, or appointed by the head of a major department.

The plaintiffs also claim the PCAOB violates the separation of powers, since it exercises executive, judicial, and even legislative powers. The PCAOB not only enforces laws and imposes fines but decides its own budget, despite Congress' assertion that the board shouldn't even be considered a government agency. The plaintiffs also argue that the board represents an unconstitutional delegation of powers, since it operates without any direct supervision by the president or Congress, or even sufficient oversight from the SEC.

The government replies that the members of the PCAOB should be considered "inferior" officers who don't require direct presidential appointment and Senate confirmation. The SEC board, it adds, is a legitimate "head of department" with constitutional powers to make appointments and sufficient oversight over the Sarbanes-Oxley enforcers.

If the plaintiffs win, all of Sarbanes-Oxley could be at risk, since the law has no severability clause that would allow a court to throw out only parts of it. At press time no decision had been issued, though Robertson vowed to rule "as soon as I can."

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