With today’s SCOTUS decision in Free Enterprise Fund v. PCAOB, the Public Accounting Oversight Board (“PCAOB”) survives but with less swagger and self-importance than before. This decision holding unconstitutional the “dual for-cause limitation” on the President’s ability to fire PCAOB members leaves the PCAOB’s form intact but downgrades its political independence.
Henceforth, according to the Supreme Court, the SEC can fire PCAOB members at will. To what effect? The SEC can now be held directly accountable for PCAOB actions and the President indirectly accountable. If you believe in government accountability, this is all to the good. Before, under SOX language that made PCAOB appointments seemingly more iron-clad than tenured university posts, the PCAOB was beholden to no one.
Some may hold to the view that this kind of tenure was necessary to protect “investor interests”. They quixotically imagine accounting and auditing to be apolitical, ivory-tower technocracies somehow above the fray. Listen in on a FASB or IASB meeting and you see a completely different picture. The reality is that accounting and politics are joined at the hip because all accounting is property and all property is politics. Isolate the PCAOB from accountability and you throw the property baby out with the political bathwater.
The majority opinion authored by Chief Justice Roberts is an instant classic. It might well be required reading for every high school student and accounting professor in America. It should be tested on the CPA exam. Some of the most significant language appears at pdf pages 20-33 (hard copy pages 14-27). A particularly compelling passage (most internal citations omitted) appears here:
The Board’s mission is said to demand both “technical competence” and “apolitical expertise,” and its powers may only be exercised by “technical professional experts.” In this respect the statute creating the [PCAOB] is, we are told, simply one example of the “vast numbers of statutes governing vast numbers of subjects, concerned with vast numbers of different problems, [that] provide for, or foresee, their execution or administration through the work of administrators organized within many different kinds of administrative structures, exercising different kinds of administrative authority, to achieve their legislatively mandated objectives”…
One can have a government that functions without being ruled by functionaries, and a government that benefits from expertise without being ruled by experts. Our Constitution was adopted to enable the people to govern themselves, through their elected leaders. The growth of the Executive Branch, which now wields vast power and touches almost every aspect of daily life, heightens the concern that it may slip from the Executive’s control, and thus from that of the people. This concern is largely absent from the dissent’s paean to the administrative state…
The Framers [of the U.S. Constitution] created a structure in which “[a] dependence on the people” would be the “primary controul on the government.” The Federalist No. 51, at 349 (J. Madison). That dependence is maintained, not just by “parchment barriers,” but by letting “[a]mbition . . . counteract ambition,” giving each branch “the necessary constitutional means, and personal motives, to resist encroachments of the others.” A key “constitutional means” vested in the President — perhaps the key means — was “the power of appointing, overseeing, and controlling those who execute the laws.” And while a government of “opposite and rival interests” may sometimes inhibit the smooth functioning of administration, “[t]he Framers recognized that, in the long term, structural protections against abuse of power were critical to preserving liberty.”
Calls to abandon those protections in light of “the era’s perceived necessity” are not unusual. Nor is the argument from bureaucratic expertise limited only to the field of accounting. The failures of accounting regulation may be a “pressing national problem,” but “a judiciary that licensed extra constitutional government with each issue of comparable gravity would, in the long run, be far worse.” Neither respondents nor the dissent explains why the [PCAOB’s] task, unlike so many others, requires more than one layer of insulation from the President — or, for that matter, why only two. The point is not to take issue with for-cause limitations in general; we do not do that. The question here is far more modest. We deal with the unusual situation, never before addressed by the Court, of two layers of for-cause tenure. And though it may be criticized as “elementary arithmetical logic,” two layers are not the same as one.
The President has been given the power to oversee executive officers; he is not limited, as in Harry Truman’s lament, to “persuad[ing]” his unelected subordinates “to do what they ought to do without persuasion.” In its pursuit of a “workable government,” Congress cannot reduce the Chief Magistrate to a cajoler-in-chief.
Most market participants who learn the facts of the case will likely end up agreeing with the Supreme Court that the PCAOB’s two layers of for-cause “insulation” were too much. They were incompatible with America’s constitutional form of government and, therefore, bad for personal liberty and property rights. The Court rightly asks, for example, what justifies the Sarbanes-Oxley Act’s impossibly high bar for removal of a PCAOB board member:
A Board member cannot be removed except for willful violations of the [Sarbanes-Oxley] Act, [PCAOB] rules, or the securities laws; willful abuse of authority; or unreasonable failure to enforce compliance—as determined in a formal Commission order, rendered on the record and after notice and an opportunity for a hearing. §7217(d)(3); see §78y(a). The Act does not even give the Commission power to fire Board members for violations of other laws that do not relate to the Act, the securities laws, or the Board’s authority. The President might have less than full confidence in, say, a Board member who cheats on his taxes; but that discovery is not listed among the grounds for removal under§7217(d)(3).7
This is the sort of knee-jerk, “torch and pitchforks” legislation too often inspired by hysteria. With Sarbanes-Oxley, it was Enron. (Today, it’s AIG and Lehman Brothers.) But viewed rationally, what God of accounting and auditing could possibly deserve such job security? The decision to overturn it is a return to sanity and the rule of law. It reaffirms the vitality of the Constitution and reminds government officials that they are (at least somewhat) accountable for their conduct to the people who put them in office.
This SCOTUS opinion will likely reverberate through the halls of government for decades to come so long as the words “law” and “Constitution” retain any meaning. And they had better retain meaning for the survival of the accounting profession which, after all, exists to account for the value and disposition of property rights guaranteed by . . . the Constitution.
More background on the case can be found at the Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board Wiki. Another insightful resource is Steven Calebrisi’s pre-decision SCOTUSCast (22 minutes).