HoukTPM

A conservative group has filed a federal suit against the Public Company Accounting Oversight Board, in an action that could invalidate the Sarbanes-Oxley Act.

According to an article in BusinessWeek, the suit "turns on two points. One is the assertion that the PCAOB exercises wide-ranging governmental powers with little oversight, violating the Constitution's separation of powers. The second issue deals with how five members of PCAOB are appointed."

They are arguing that the makeup of the accounting board violates the separation of powers doctrine because its members aren't appointed by the president and cannot be removed by him, and Congress cannot control its budget. The chairman of the oversight board and the other four directors are appointed by the Securities and Exchange Commission, an independent federal agency; the accounting board is funded by fees on publicly traded companies according to their size.

The Constitution's Appointments Clause gives the President the power to appoint the nation's officers, with the advice and consent of the Senate. This is to ensure that regulatory agencies are accountable to elected officials, who are in turn accountable to voters.

Yet under Sarbox, the President can neither appoint nor remove [PCAOB] members. Sarbox requires that the appointed Securities and Exchange Commissioners themselves appoint the oversight Board. Similarly, only the SEC can remove Board members, and then only if they can be shown to have willfully violated federal laws. Nowhere in any of this is there a role for the elected executive.

The congressional committees involved in the drafting got legal opinions that satisfied them that the appointment process was constitutional. "Constitutional scholars in Congress and universities . determined that the law's appointment process was constitutionally sound," according to BusinessWeek.

The issue might turn on whether the PCAOB board members are "high-ranking officials", who must be appointed by the President.

Still, the question ... is not a settled matter. And a court might consider the PCAOB members high-ranking after all, by virtue of their pay -- upwards of $450,000 a year. "Their pay and the fact that they set their own budget and Congress has no power of the purse over them suggests that they could be considered principal officers," says Hans Bader, a legal expert at the Competitive Enterprise Institute.

An oddity of Sarbox is that, unlike most laws, if any portion of it is struck down, the whole thing falls.

If the PCAOB is found to be unconstitutional . the entire statute could be at risk because Sarbanes-Oxley lacks "severability" -- a provision, standard in most laws, that says that a judicial ruling striking down one portion of the law doesn't affect the rest of the statute.

Legal scholars say that, as a practical matter, much of Sarbanes-Oxley . could survive intact. But if and when Congress reopens the law, it could create an opportunity for wholesale revision.

Business groups could be counted on to lobby hard to weaken many provisions. Already, says Rep. Mark Kirk (R-Ill.), "there is a bipartisan concern over Sarbanes-Oxley and its effect on small business" because of the cost of compliance with the law.

While the questions of constitutional law are very interesting, I wonder how much this means to us TPM folks. Sarbox has had such a huge effect on our business that the first impulse is to think that its disappearance would mean that everything would go back to the way it was.

What has happened as a result of FASB, Sarbox, and all the scandals they uncovered, is that CFOs, CEOs, and their boards have had a look at what was going on in trade promotion, and it horrified them. They saw huge portions - 10%, 15%, 20%, and more - of their sales being spent on . what exactly? Being spent to . um, well, we don't actually know what the goal was.

Sarbox will very possibly be modified somewhat, but the effect it has had on trade promotion - a demand for accountability, a demand to know what is being bought, and why, and what it accomplished - will be lasting.

For more news and commentary on a daily basis, visit our blog, TPMtoday. Among the topic in the past few days:

February 16, 2006

A constitutional challenge to Sarbanes-Oxley