Sarbanes-Oxley Makes it to Supreme Court


The controversial set of 2004 regulations on financial accounting, Sarbanes-Oxley, are facing a constitutional challenge that the Supreme Court has decided to take up for this year's session. The challenge is on somewhat narrow procedural grounds involving separatation of powers. From the Washington Post's account:

Under Sarbanes-Oxley, a new Public Company Accounting Oversight Board was given the power to set auditing standards, inspect audit firms and investigate suspected wrongdoing by firms that certify the reliability of corporate financial statements.

Plaintiffs in the Supreme Court case allege that the authors of the act set out to insulate the board from political pressure and went too far. They contend that the act leaves the president with insufficient control over what are essentially executive functions, thereby violating the constitutional separation of powers.

Among other things, plaintiffs object to the fact that members of the oversight board are appointed by the Securities and Exchange Commission, which they say impinges on the president's authority to make appointments.

The Department of Justice didn't want the Supremes to take the case, the Post reports:

Urging the Supreme Court not to take the appeal, the Justice Department argued that Congress modeled the oversight board on so-called self-regulatory organizations that oversee stock exchanges and stockbrokers. The SEC has the ultimate authority over every aspect of the oversight board's work, the Justice Department wrote. 

The libertarian policy and activism house Competitive Enterprise Institute is one of the plaintiffs. From their press release, explaining why they see such a problem with the way Sarbanes-Oxley works on constitutional grounds:

The Appointments Clause of the Constitution requires that "officers of the United States" be appointed by the president and confirmed by the Senate.  But the officers serving on the PCAOB, with tremendous power to impose criminal and civil penalties on people and companies accused of violating accounting regulations, were not appointed that way.

"The Founding Fathers wanted powerful government officials to be vetted by the President and the Senate, to help ensure agencies remain accountable to elected officials and ultimately the American people," said Sam Kazman, CEI General Counsel.  "The PCAOB imposes massive regulatory burdens on public companies, under threat of criminal and civil penalties, yet the regulators are completely unaccountable to the people, the President or the Senate."

I blogged about this case at its beginnings back in 2006. Also, see the January 2006 roundtable of interviews from economists and accounting pros on Sarbanes-Oxley's likely effects, and this January 2009 update on the latest data on SarbOx's cost and effectiveness.