Commentary

Peekaboo, I See a Constitutional Violation

Imagine a government agency with the authority to create and enforce laws, prosecute and adjudicate violations, and impose criminal penalties. Then throw in the power to levy taxes to pay for all the above. And for good measure, make the agency independent of political oversight.

As any middle-schooler could tell you, such an entity goes against every principle of American civics. Still, it’s an accurate description of the Public Company Accounting Oversight Board (PCAOB, pronounced “peek-a-boo”).

PCAOB enforces the Sarbanes-Oxley Act of 2002 (“Sarbox”) by monitoring public companies’ accounting practices. The board wields all the powers traditionally divided among the three branches of government and so is widely considered its own branch — or, rather, a government in microcosm.

An accounting firm subject to Sarbox (Beckstead and Watts, LLP), along with a nonprofit advocacy group (the Free Enterprise Fund), filed a lawsuit challenging PCAOB’s constitutionality. They contend that the board violates separation of powers principles and the appointments clause, which requires that the president appoint high government officials and that even “inferior officers” report to “heads of departments.” Today, the Supreme Court hears arguments in the case that will decide PCAOB’s fate, Free Enterprise Fund v. PCAOB.

As any middle-schooler could tell you, such an entity goes against every principle of American civics.

PCAOB’s questionable legality traces to the Enron and WorldCom scandals, when Congress rushed to pass new accounting standards (many of which Enron would have already satisfied). Debate lasted one day in the House, and one week in the Senate. The result: onerous bookkeeping requirements and an enforcement body that is at once lawmaker, tax collector, inspector, sheriff, prosecutor, judge and jury.

Among PCAOB’s mandates is the power to make whatever rules are “necessary or appropriate in the public interest or for the protection of investors.” House Financial Affairs Committee Chairman Michael Oxley declared that the board’s “governmental powers” would be “extraordinary and maybe even beyond constitutional.”

More disturbing than PCAOB’s sweeping power is its utter lack of accountability. The Framers recognized that a system of checks and balances was necessary to prevent an overzealous government from infringing individual rights. Traditional independent agencies, such as the Securities and Exchange Commission (SEC) or the Federal Communications Commission, wield significant executive power — and so the appointments clause provides for presidential oversight. This structure ensures coordination with other executive functions, prominent and undivided public accountability, and the incentives necessary to resist narrow interest group pressures.

PCAOB members, however, may be removed only “for cause” by members of another independent agency, the SEC — and then only when the board member at issue is guilty of willful misconduct. In turn, SEC commissioners are removable by the president only “for cause.” This double “for cause” removal procedure insulates PCAOB from presidential control, guaranteeing it free reign to pursue whichever policy agenda it wants — while also shielding the president from responsibility for (and thus political fallout from) unpopular or otherwise harmful board decisions.

Among PCAOB’s mandates is the power to make whatever rules are ‘necessary or appropriate in the public interest or for the protection of investors.’ More disturbing than PCAOB’s sweeping power is its utter lack of accountability.

And ample evidence suggests that PCAOB’s actions have been anything but salubrious. Studies indicate that Sarbox has imposed a $1.4 trillion net loss — fraud prevented minus compliance costs — on the American economy, while a survey of financial officers found that large companies spend a yearly average of $1.7 million on the new accounting procedures. And because the cost as a percentage of revenue is even greater for smaller companies, Sarbox effectively keeps those firms out of the capital markets — or forces them to go overseas. One journalist noted that London bankers “would like to erect a solid gold statue in honor of the legislators who sponsored [Sarbox].”

The D.C. Circuit held PCAOB to be constitutional, finding that its members are inferior officers of the SEC and that the removal limitations are insufficient to strip the president of the oversight power required by the appointments clause. As dissenting judge Brett Kavanaugh detailed, this reasoning is tenuous at best and ratifies a derogation of the principles underlying our system of government.

Calling Free Enterprise Fund v. PCAOB the most important separation of powers case in 20 years, Kavanagh explained that “never before in American history has there been an independent agency whose heads are appointed by and removable only for cause by another independent agency.” Even though PCAOB “performs numerous regulatory and law enforcement functions at the core of the executive power,” its structure prevents the president from performing his Article II responsibilities.

To uphold constitutional checks and balances — and for the sake of the economy — the Supreme Court should strike down this unholy new branch of government.

Ilya Shapiro is a senior fellow in constitutional studies at the Cato Institute, where Travis Cushman is a legal associate. Cato filed an amicus brief supporting the petitioners in Free Enterprise Fund v. PCAOB.