Sarbanes-Oxley oversight board facing constitutional challenge

A group of advocates for free enterprise and limited government that includes former federal independent counsel Kenneth Starr is challenging the constitutionality of the Sarbanes Oxley Act and its provisions that govern the accounting of public companies.

The Free Enterprise Fund of Washington, D.C. filed a constitutional legal challenge to the Public Company Accounting Oversight Board (PCAOB) created by Congress as part of the Sarbanes-Oxley Act, which was enacted in 2002 following a number of corporate scandals. The SOX Act has been criticized by businesses, including insurers, for imposing new costs on publicly traded U.S. businesses.

The lawsuit claims that although the Sarbanes-Oxley Act purports to make the board a private entity, it delegates to the board vast governmental powers.

The complaint was filed in U.S. District Court for the District of Columbia on Feb. 7.

The complaint alleges that the PCAOB violates the Appointments Clause of the Constitution because it is composed of superior “officers” who need to be appointed by the President rather than the Securities and Exchange Commission.

The suit’s broader claim is that the PCAOB violates separation of powers principles because its members perform an executive function but are not appointed or removable by the President or any executive branch entity. By giving the board unbridled authority to set standards regulating accounting firms and to finance its own operations by charging a fee to public companies, Congress violated the constitutional prohibition on delegating its legislative powers to an entity outside the legislative branch, according to the suit.

The complaint seeks an order declaring unconstitutional the provisions of the Sarbanes-Oxley Act.