D.C. Circuit to rule in Free Enterprise Fund v. PCAOB: SOX & PCAOB endangered?

by Kurt Schulzke on June 24, 2008

The securities law blogosphere has been bubbling with speculation — since the April 15 oral arguments in Free Enterprise Fund, et al. v. PCAOB — over how the D.C. Circuit Court might rule in the case. It is possible that the PCAOB and SOX could disappear in a cloud of appellate ink before summer’s end. Some observers, including the Washington Legal Foundation, believe it’s high time:

“Sarbanes-Oxley has been an unmitigated disaster for American businesses, while an unaccountable PCAOB runs amok among the accounting industry and our nation’s public companies,” said Paul Kamenar, WLF’s Senior Executive Counsel.

In a June 5 memo, Linda Lord, UBS Head of Legislative and Regulatory Affairs (US) goes so far as to prognosticate, “Sarbanes-Oxley Act (SOX) Will Fall”. In her memo, Lord walks through possible implications of a decision against the PCAOB.

One possibility explored by Lord is that the PCAOB’s functions could be rolled up into the SECs Office of the Chief Accountant. Lord speculates that, in such a case, “the SEC will have a direct role in establishing accounting standards.” This seems not very speculative in light of the fact that the SEC has already been exercising such a role, albeit without due process, through — among other mechanisms — the publication of Staff Accounting Bulletins.

SAB No. 104, on revenue recognition, stands out as a particularly clear example. In SAB 104, the SEC’s staff have essentially created all on their own the only current, generally applicable revenue recognition standard used by U.S. GAAP practitioners.

More background on the case — including the WLF’s amicus brief — is available through the Washington Legal Foundation’s website. Look for the D.C. Circuit to rule by August 1.