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If Sarbanes-Oxley were a stock, we’d recommend selling it short. It’s only a law, of course, and can’t be sold in the literal sense. But on Friday a panel of judges who ride the District of Columbia Circuit of the United States Court of Appeals put it in what, in Constitutional terms, amounts to play.
They decided, by a vote of two to one, to uphold the constitutionality of the law. But a devastating dissent by Judge Brett Kavanaugh all but begs for Supreme Court review. Our bet is that federal high court can, in its wisdom, be counted on to reverse. We give it a year before the Nine tell American businesses that they are free to produce a little more and audit a little less.
The question posed by the case, Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board et al., had nothing to do with whether the auditing requirements and increased criminal liability and penalties of Sarbanes-Oxley have hurt our public companies, and, by extension, every American with a stock portfolio or a pension plan. The issue is whether Sarbanes-Oxley’s creation of an agency to police auditors of public companies violated the doctrine of separated powers.
The chief constitutional problem with the law is that the five board members at this new agency — the Public Company Accounting Oversight Board of the suit’s caption — aren’t appointed by the president. Nor can the president fire them. Instead the commissioners of the Securities and Exchange Commission, who are presidential appointees, get to do the hiring and firing for the new Oversight Board. And the firing can only be for cause.
The result is a regulatory agency whose top officials — unlike those in the SEC, Justice Department, and Treasury Department — are well insulated from the elected leader of the executive branch. It’s as though Congress wanted to add to the judicial, legislative, and executive branches, a new independent branch of government: the auditors.
Judge Kavanaugh wrote in his dissent: “The President’s power to remove is critical to the President’s power to control the Executive Branch and perform his Article II responsibilities. Yet under this statute, the President is two levels of for-cause removal away from Board members, a previously unheard-of restriction on and attenuation of the President’s authority over executive officers.”
Judge Kavanaugh was an associate counsel to Mr. Bush in 2002, when the president signed the bill into law. We don’t know whether he advised the president against signing the legislation back then. If he did, he’s just advanced his case. If he didn’t, he’s more than made up for it in a dissent calculated to ring the chimes of the Roberts-Scalia Court.