Lead Article:

SUPREME COURT TO TEST SARBANES-OXLEY

MSLF: Put End To Unconstitutional Agencies

by William Perry Pendley

On October 5, “the First Monday in October,” the Supreme Court of the United States began its October 2009 Term. One of the important cases the Court will consider—Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB)—asks whether the PCAOB, established by Congress in the 2002 Sarbanes-Oxley Act in response to the Enron “crisis,” complies with the Constitution. One judge from the U.S. Court of Appeals for the District of Columbia called it "the most important separation-of-powers case regarding the president's appointment and removal powers to reach the courts in the last 20 years." MSLF, which was active in the case at the Court of Appeals, filed a friend of the court (amicus curiae) brief, urging the Supreme Court to overturn the Court of Appeals, to hold the PCAOB unconstitutional, and to overturn a series of its decisions that has permitted the plethora of administrative agencies that are accountable to no one.

The PCAOB is a private-sector, nonprofit corporation that oversees the auditors of public companies in order to “protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports.” It has five full-time members, including its chairman, all appointed by the Securities and Exchange Commission (SEC). The chairman is paid $556,000 a year, every other board member $452,000. Headquartered in Washington, D.C., it has an annual budget of $100 million and a staff of 300. Its activities are approved and overseen by the SEC, which can revise or reverse its rules.

In February 2006, the Free Enterprise Fund, a nonprofit, IRC 501(c)(4) group that champions limited government, along with a small Nevada accounting firm, filed a lawsuit challenging the constitutionality of the PCAOB. The Fund argues that the Act quadrupled the auditing expenses of public corporations and costs the U.S. economy nearly $35 billion each year. The worst is yet to come, argues the Fund, when the Act is applied to smaller companies and even nonprofit entities. Constitutionally, argues the Fund, PCAOB is “a quasi-legislative, quasi-executive, quasi-non-profit regulatory commission,” that violates the Constitution’s “Separation of Powers Doctrine” as well as the “Appointments Clause.” Nonetheless, in March 2007, the federal district court for the District of Columbia upheld the Act’s constitutionality. In August 2008, the U.S. Court of Appeals for the District of Columbia, by a 2-1 margin, agreed and, in November 2008, rejected petitions for rehearing and rehearing en banc, by 2-1 and 5-4 respectively. On May 18, 2009, however, the Supreme Court agreed to hear the matter. All briefing in the case has been completed.

The Constitution is explicit as to the structure of the federal government. The Founders believed that all governmental power is composed of one of three types: legislative, executive, and judicial; to ensure the “checks and balances” essential to preserve liberty, they vested those powers in three separate, distinct, and co-equal divisions of government. “All legislative Powers,” they wrote, “shall be vested in a Congress….” Likewise, the “executive Power shall be vested in a President,” and the “judicial Power of the United States shall be vested in one Supreme Court [and inferior courts].”

Despite this specificity, over the decades Congress blurred these lines by creating executive entities that report, not to the President, but to the multi-headed monster that is Congress, hence to no one. Worse yet, the Supreme Court failed to enforce the limits of the Constitution, enabling Congress, in Madison’s words, to “draw all power into its impetuous vortex.” In a series of cases beginning in 1886, extending through 1935, and culminating in 1988 (in a ruling Justice Scalia called “an open invitation for Congress to experiment”), the Court authorized the administrative state.