Today, a three-judge panel of the D.C. Circuit Court of Appeals handed down a much-anticipated 2-1 decision in Free Enterprise Fund v. PCAOB. The panel, in my view, reached the wrong conclusion, holding in essence that the PCAOB can rule over the world of U.S. accounting and auditing while immune from constitutional checks and balances. The crowning irony is that the PCAOB, supposedly designed to promote accountability, is itself so unaccountable for its actions.
Likely, the case will be reheard en banc and/or decided by the Supreme Court. Meanwhile, the best, most coherent reading is found in Judge Kavanaugh’s eloquent 57-page dissent:
The two constitutional flaws in the PCAOB statute are not matters of mere etiquette or protocol. . . the Act renders this Executive Branch agency unaccountable and divorced from Presidential control to a degree not previously countenanced in our constitutional structure. This was not inadvertent; Members of Congress designed the PCAOB to have “massive power, unchecked power.” 148 CONG. REC. at S6334 (statement of Sen. Gramm). Our constitutional structure is premised, however, on the notion that such unaccountable power is inconsistent with individual liberty. “The purpose of the separation and equilibration of powers in general, and of the unitary Executive in particular, was not merely to assure effective government but to preserve individual freedom.” Morrison, 487 U.S. at 727 (Scalia, J., dissenting); see also Clinton v. City of New York, 524 U.S. 417, 450 (1998) (Kennedy, J., concurring) (“Liberty is always at stake when one or more of the branches seek to transgress the separation of powers.”). The Framers of our Constitution took great care to ensure that power in our system was separated into three Branches, not concentrated in the Legislative Branch; that there were checks and balances among the three Branches; and that one individual would be ultimately responsible and accountable for the exercise of executive power. The PCAOB contravenes those bedrock constitutional principles, as well as long-standing Supreme Court precedents, and it is therefore unconstitutional.
Although the constitutional violations here are serious, two points are important to bear in mind. First, finding the PCAOB unconstitutional would not itself call into question the many other independent agencies that dot Washington, D.C. . . . Second, and relatedly, the constitutional flaws here could be easily and quickly corrected. Congress could simply amend the statute to require, for example, that the PCAOB members, like the heads of other agencies, be appointed by the President with the advice and consent of the Senate and therefore be removable by the President. . . . Alternatively, Congress could make the Board part of the SEC – directed, supervised, and removable at will by the Commission just like inferior officers in the SEC. In the meantime, however, the Board’s structure violates the Constitution of the United States.
The PCAOB’s response to the decision seems a bit too self-congratulatory for the occasion. Here’s the PCAOB’s statement:
The PCAOB is gratified by the Court of Appeals decision today, upholding the District Court’s decision in the PCAOB’s favor. The Court held that the manner in which PCAOB Board members are appointed and overseen under the Sarbanes-Oxley Act is constitutional. The Court’s opinion is consistent with the position taken by the PCAOB, the U.S. Government through the Department of Justice and the Securities and Exchange Commission (SEC), seven former SEC chairmen, the Council of Institutional Investors, TIAA-CREF, AFL-CIO, and several public employee pension funds.
“The PCAOB is gratified?” Delusions of royalty. The list of supporters is ad hominem smoke. I love it that the AFL-CIO is on the list. That the PCAOB sees AFL-CIO support as a plus says a lot about what the organization is all about. And the DOJ and SEC? Predictable. Coalitions like this are why we have a Supreme Court.
While Congress and the PCAOB could easily resolve the controversy now by fixing a few obvious constitutional flaws, they want raw, unchecked power and will have no qualms over dragging the markets through another year or two in pursuit of it.
You can read the entire decision here.