Decision To Be Appealed

Washington, D.C., March 21, 2007— A federal district judge on Wednesday dismissed a constitutional challenge to the Public Company Accounting Oversight Board (PCAOB) brought by the Competitive Enterprise Institute and the Free Enterprise Fund. The case will be appealed to the circuit court. Read the decision.

The lawsuit, filed on February 7, 2006, alleges that the PCAOB violates the appointments clause (Article II Section 2) of the U.S. Constitution, which grants the power to appoint high level government officials to the President, the courts, or the heads of departments– not a commission such as the Securities and Exchange Commission. The PCAOB was created by Congress as part of the Sarbanes-Oxley Act of 2002.

The board wields great power over the businesses it regulates, and its regulations and mandates have produced costly and unintended consequences for publicly traded U.S. businesses, as well as for entrepreneurs and capital markets. Yet it is entirely unaccountable to any elected official. The board’s five members are appointed for five-year terms, not by the President or the head of an executive branch, but by the SEC acting as a collective body.

Statement by John Berlau, Director of the Center for Entrepreneurship:

The court said that PCAOB members are appointed by a multimember body—the SEC– not by the head of an agency, as required by the Constitution but that, in this particular case, the error was harmless, because the SEC’s Chairman voted for them.  But when constitutional safeguards are at stake, there are no harmless errors.

The appointment scheme for members of the Public Company Accounting Oversight Board, created by the law when Congress passed it in 2002, violates what the Framers saw as one of Constitution’s core provisions to ensure accountability in government.  And the importance of the Appointments Clause has been recognized by Supreme Court justices across the political spectrum. In a sense, Congress’s mistake in vesting appointment of the Board collectively in all the SEC Commissioners, rather than the SEC Chairman, allowed the court to throw this case out on a technicality.

The case, Free Enterprise Fund v. The Public Company Accounting Oversight Board, was filed in U.S. District Court for the District of Columbia. Plaintiffs include the Free Enterprise Fund and Beckstead and Watts, LLP, a small Nevada accounting firm. CEI is co-counsel in the case.