June 15, 2006 4:10PM

An Unnecessary, Expensive, and Probably Unconstitutional Board

Congress should pay attention to what is happening with one of their recent creations. The Securities and Exchange Commission will soon appoint two members of the Public Company Accounting Oversight Board (PCAOB), a private monopoly that was created by the Sarbanes‐​Oxley Act of 2002. This board is unnecessary, expensive, and probably unconstitutional.

This board was created to establish auditing standards for all public accounting firms and to monitor the performance of these firms, based on the presumed failure of Arthur Andersen, one of the formerly Big 5 public accounting firms, to adequately audit the financial reports of Enron. The Sarbanes‐​Oxley Act, however, left in place a major conflict of interest affecting these firms: The public accounting firms continue to be paid by the companies that they audit. Instead of correcting this conflict of interest, Congress established a new board to regulate all of the public accounting firms, although only a few such firms have ever been charged with a major breach of auditing standards. Congress could have corrected this conflict of interest by shifting the payment for audits from the audited firms to the stock exchanges on which the firms are listed; the stock exchanges would then recover the audit payments in their listing fees. In this case, the PCAOB would be unnecessary, an overreaction to what was apparently a rare breach of the existing auditing standards.

The PCAOB is outrageously expensive. The chairman is paid an annual salary of $615,000, and each of the other four members are paid an annual salary of $500,000 — in both cases, a multiple of the salary of the President of the United States who has many more serious problems to worry about.

Moreover, all of the candidates for the two open positions are current or former federal officials for whom a much lower salary was a sufficient incentive.

As a private monopoly with both regulatory powers and taxing powers, the PCAOB is probably also unconstitutional. The PCAOB sets its own budget that is financed by a mandatory fee on all public listed corporations. A case has already been filed that challenges the constitutionality of the PCAOB, which if successful would probably invalidate the whole of the Sarbanes‐​Oxley Act. So much the better.

For an update, see here.