Court ruling ‘another reason to vote no on Dodd-Frank’ 

Monday’s Supreme Court ruling striking down Chicago’s gun ban stole all of the headlines, leaving another critical court decision largely unnoticed. But the Competitive Enterprise Institute’s successful challenge to a section of the 2002 Sarbanes Oxley (SOX) Act is another triumph for strict constructionists. It also offers hope for beleaguered companies already struggling under heavy-handed government regulation.

CEI’s Free Enterprise Fund filed the original lawsuit on behalf of Brad Beckstead, a Nevada accountant whose two-person accounting firm was being strangled by red tape.

In its 5-4 ruling in Free Enterprise Fund v. Public Company Accounting Oversight Board, the court agreed that the board (PCAOB, known colloquially as “Peek-a-boo”), which was set up by SOX to oversee the accounting practices of public companies, violates the Constitution’s separation of powers clause because board members are not accountable to the president.

PCAOB members report to the Securities and Exchange Commission (SEC), and the SEC can only remove them “for good cause.”  SEC commissioners themselves can also only be removed by the president “for good cause.” The justices ruled that this “dual for-cause limitation” denied the president the direct authority over executive branch personnel that he was granted under the Constitution.

The ruling also cast doubts on Congress’ ability to regulate financial markets, since the flawed SOX was supposed to be Capitol Hill’s solution to deceptive Enron-era accounting practices.

Jones Day attorney Michael Carvin and CEI attorneys Hans Bader and Sam Kazman argued that since 2002,  PCAOB’s “inner control” mandate cost American businesses $35 billion by forcing auditors to keep track of minutiae such as office keys and employee passwords, but did not adequately address the “off –balance sheet entities” that Enron, Lehman Brothers and other financial firms used to hide growing levels of debt from stockholders and government regulators.

SOX was a typical government response to a crisis. It forced law-abiding businesses to spend $35 billion to address a problem created by their unscrupulous peers, who were in turn permitted to continue the shady accounting practices that were the original problem.

However, John Berlau, director of CEI’s Center for Investors and Entrepreneurs, says that the court ruling will likely open all of PCAOB’s auditing rules to legal challenge. “I never consider a ruling narrow or technical if it concerns violation of the Constitution. Everything our Founding Fathers put in there is to guarantee our liberty,” Berlau told The Examiner.

“The most costly requirements are under section 404 of the act, which has been misinterpreted by the PCAOB as requiring full external audits of all internal control measures, despite the plain language of the law,” said Phil Kerpen, former executive director of the Free Enterprise Fund and current vice president for policy at Americans for Prosperity.  “This is a direct consequence of the un-Constitutional, unaccountable structure of the Board that the Court has now struck down. But the court left the audit requirements intact. Congress should therefore follow through with substantive reform, including repealing section 404. And the lesson of the unconstitutional disaster Sarbanes-Oxley has been should give members of Congress another strong reason to vote no on Dodd-Frank.”

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