On February 8, 2006, The Free Enterprise Fund and the Competitive Enterprise Institute (www.cei.org) launched a Constitutional legal challenge to the Public Accounting Oversight Board (PCAOB) created by Congress as part of the Sarbanes-Oxley Act of 2002 (SOX).
A recent University of Rochester study concluded that the total effect of SOX has reduced the stock value of American companies by a staggering $1.4 trillion dollars. The regulatory burden of this legislation absolutely outweighs its benefits.
PCAOB is unconstitutional for a variety of reasons. It violates the appointments clause (Article II Section 2) of the U.S. Constitution. It grants significant regulatory powers and the power to tax companies to fund its activities. This violates the separation of powers.
It is past time this overwrought piece of regulation was challenged, since it was past in haste, and its unintended consequences on the economy we will be forced to deal with permanently. Not only would SOX not have prevented Enron, WorldCom, etc., it punishes the very people it is designed to protect—shareholders—by imposing regulatory burdens than reduce profitability and stock values. Further, it rewards, with over $1 billion in worth of regulatory revenue, the very profession—auditors—that played a part in the failure of Enron, etc.
If the requirements detailed in SOX were so valuable for companies to implement, some companies would have already adopted them, and the their cost of capital would be lower, conferring upon them a competitive advantage that would be rapidly copied by competitors. The fact that this has not happened should give us pause about the supposed salutary effects of this legislation. The pricing mechanism, guided by the invisible hand, is always far more effective than the dead foot of government regulation.
It is obvious that the think tanks have taken the lead in opposing the wastefulness of this act, as the accounting profession, along with the AICPA and the state societies, has too much to gain from performing SOX work. You could fill a Mini Cooper with competent economists who support SOX, and still have room for a portly chauffer. VeraSage Fellows will fight against this wasteful regulatory act, and we believe an enlightened Congress would repeal it immediately.
To read a copy of the full Complaint filed by The Free Enterprise Fund and Beckstead & Watts, LLP, an accounting firm in Henderson, Nevada, visit: http://www.cei.org/gencon/025,04873.cfm
For the best book written on the downfall of Enron, and the only one that offers any sensible and economically literate alternatives to auditing and accounting reform, see my book review of After Enron, edited by William Niskanen. This book has been virtually ignored in the mainstream accounting press, but among think tanks it is a tour de force, and we would be wise to follow its suggestions for reform.
We will monitor this case closely and periodically provide updates, in our Sox is Broken thread.