X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
The new Congress convening this month may be more willing to tinker with the Sarbanes-Oxley Act than the previous one. After all, the law’s chief architects, Rep. Michael Oxley (R-Ohio), former chairman of the House Financial Services Committee, and Sen. Paul Sarbanes (D-Md.), the former ranking member on the Banking Committee, have retired. But even if Congress doesn’t bring the 2002 corporate-reform law to the floor, a D.C.-based free market group’s lawsuit challenging its constitutionality could force Congress to reconsider the law. Late last month, Judge James Robertson of the U.S. District Court for the District of Columbia heard arguments in a case filed by the Free Enterprise Fund and Beckstead and Watts, a Nevada accounting firm that focuses its auditing businesses on small companies. Beckstead is under investigation by the Public Company Accounting Oversight Board (PCAOB) for auditing deficiencies. The fund and Beckstead claim the PCAOB lacks accountability and that the provisions of Sarbanes-Oxley that established the board are unconstitutional because they violate the constitutional requirement that key executive branch officials be appointed by the president and infringe upon the president’s authority. Although the suit specifically targets the accounting board, the fund has made no bones about the fact that it hopes to prompt a full-scale review of the act, which Congress passed to restore investor confidence in the wake of a series of corporate scandals involving Enron, WorldCom, and a bevy of other companies. The board was created to oversee the formerly self-regulating accounting industry’s auditing of public companies and make sure that accounting firms don’t merely rubber-stamp bogus financial statements that were at the core of many of those scandals. The provisions of the act are not severable, so if the court were to agree that the provisions establishing the board are unconstitutional, it would invalidate the entire law. Congress would then have to pass corrective legislation, which could become a vehicle to offer amendments to other provisions and spark a greater debate about the law. Echoing many business leaders who have claimed that the costs of complying with Sarbanes-Oxley outweigh its benefits, the fund argues that the law has had enormous unintended consequences on the American economy and that it is driving public companies out of the United States. Power points The PCAOB “wields enormous coercive power,” Michael Carvin, the fund’s lawyer, said at the Dec. 21 oral arguments. In its desire to insulate the board from political pressure, Congress created a quasi-independent entity that is unaccountable to the executive branch, he added. Carvin, a partner in Jones Day’s Washington office, argued in front of the Florida Supreme Court on behalf of George W. Bush in the 2000 Florida election-recount controversy. The fund’s counsel on the case includes other Republican luminaries, such as Kenneth Starr, who as independent counsel investigated President Bill Clinton and is now the dean of Pepperdine University’s law school, and former Bush Justice Department official Viet Dinh, now a professor at Georgetown University Law Center. The PCAOB has broad powers to set the standards regulating accounting firms and to investigate and bring disciplinary proceedings against noncompliant firms. Carvin argued that the exercise of this broad power makes the board’s five members “principal officers” under the appointments clause of the Constitution, who must be appointed by the president with the advice and consent of the Senate. The board’s attorney, Jeffrey Lamken, a D.C.-based partner with Baker Botts and head of the firm’s Supreme Court and appellate practice, countered that the board’s members are, in fact, “inferior officers” under the appointments clause, because they are subject to pervasive supervision and oversight by the Securities and Exchange Commission. But Carvin added that even accepting the government’s argument that the board’s members are inferior officers, the way in which they are appointed violates the appointments clause because they are appointed by the SEC as a whole, rather than the SEC chairman. The appointments clause calls for inferior officers to be appointed by the head of a department, he said. Moreover, the way in which the board is structured, with broad powers and minimal oversight, violates separation-of-powers principles, Carvin argued. The Constitution requires that, at a minimum, the president have broad removal authority over all those who wield executive power. But the president has no say in removing board members and no ability to review the board’s policies; he is effectively divested of any ability to control the PCAOB, Carvin said. In fact, the president couldn’t even do anything to fire a “board member who had engaged in Watergate-like crimes,” Carvin added. But Lamken argued that the Constitution doesn’t require the president to have direct power to remove and supervise inferior officers such as the PCAOB members. “The board doesn’t exist in a vacuum; it realizes everything it does is under SEC review,” Lamken said, noting that the SEC reviews the board’s regulations and decisions, can remove board members, has veto power over the board’s budget, and controls the scope of the board’s authority. For example, rules the board establishes aren’t enforced until the SEC approves them, and sanctions issued by the board are stayed until the SEC reviews them. Moreover, Lamken pointed out that Beckstead could have asked the SEC to review the report the PCAOB issued as a result of its investigation, but it had never done so. Executive action Meanwhile, the government, which intervened in the case, wasn’t sympathetic to the fund’s claims that the board encroached on executive authority. The Justice Department’s Robert Katerberg said the executive branch didn’t take such claims lightly, but had concluded that “executive power isn’t infringed.” Katerberg reiterated Lamken’s argument that Sarbanes-Oxley vested the SEC with review power over every final legal action the PCAOB takes. He added that beyond those review powers, the SEC has the authority to create an even more rigorous system of oversight to rein in the board. The fund, he claimed, was looking at Sarbanes-Oxley with a “jaundiced” view. “It’s impossible not to come to the conclusion that they are looking for constitutional problems,” Katerberg said and asked the judge to dismiss the case. Robertson said he would rule as soon as he could. Although the attorneys at the Dec. 21 hearing argued the merits of the case, the judge could still throw it out on a technical issue. Robertson still has not ruled on the board’s motion to dismiss made in May of last year, in which the board claimed that the plaintiffs should have challenged the board’s rules before the SEC before being able to bring the lawsuit in court. Meanwhile, late last month the SEC and the board announced proposed changes to some of Sarbanes-Oxley’s most controversial provisions. The changes would relax the rules in the act’s Section 404, which regulates how auditors sign off on the effectiveness of public companies’ internal controls. Alexia Garamfalvi can be contacted at [email protected]

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.