A federal appeals court, in a 2-1 split decision announced Friday, held that the accounting oversight board created in 2002 as part of the Sarbanes-Oxley reforms is constitutionally permitted. The decision has been described as a victory for supporters of Sarbanes-Oxley and the Public Company Accounting Oversight Board. But it may in fact be its last gasp.
"Our bet is that federal high court can, in its wisdom, be counted on to reverse," the editorial writers at the New York Sun write. "We give it a year before the Nine tell American businesses that they are free to produce a little more and audit a little less."
After the jump, we explain why the Sun is probably right.
The core of the debate over the accounting board is its independence. The board is appointed by the Securities and Exchange Commission, and its officers are removable only "for cause." Supporters celebrate this independence from the political world as a strength of the board. Critics, including the dissenting judge in the case decided Friday, point out that the Constitution doesn't envision powerful government agencies that are quite so independent from political--which is to say, democratic--control.
Long standing constitutional doctrine holds that only "inferior officers" are supposed to be appointed by someone other than the president. When Congress attempts to create government officers that are not appointed by the president, it risks infringing on constitutionally protected turf of the president. In the past, when the court has upheld laws that came close to infringing on presidential powers--such as the independent counsel law--it emphasized that the prosecutors involved were removable by the Attorney General, who can be removed by the president and therefore operates under only slightly indirect presidential control. As the dissenting judge, Brett Kavanaugh, pointed out in the Sarbanes-Oxley case, the president exercises no such control over the accounting board.
We know a lot of readers and market watchers lack patience with separation of powers arguments, which can seem like academic exercises in formalism or simply turf battles between branches of government. "Why should a business care who appoints the damned PCAOB?" one Wall Street veteran told us over drinks a few weeks ago.
It's a fair point, so we'll take a moment to explain why the constitutional structure matters in these cases. The founding fathers understood that unchecked government powers were dangerous, and designed a constitution that placed strict limits on who could exercise those powers. The rule that the man elected president holds the executive power not only checks the other branches of government, it checks the president himself by making him politically accountable for the appointment, removal and actions of executive officers.
It is often politically convenient for a president to attempt to escape political accountability by ceding powers to unchecked independent agencies. If they overstep their bounds or exercise power capriciously or in ways unpopular with the public, the president can throw up his hands. "Hey! I can't do anything about those darned PCAOB guys," he might say. The Bush administration, for instance, supports the PCAOB. It signed Sarbanes-Oxley into law. One of the tasks of the courts have been to prevent this escape from accountability into autonomous state agencies.
Perhaps the most ominous sign for the PCAOB is the fact that Judge Kavanaugh clerked for Supreme Court Justice Anthony Kennedy, who would probably hold the swing vote if the case went to the Supreme Court. His dissenting opinion seems tailor-made to provoke the conservative wing of the court into striking down the board. Unless Congress acts to amend it, we'd bet the autonomous PCAOB is headed for extinction.
Free Enterprise Fund v. PBAOB [pdf]