PCAOB Prevails in Lawsuit

The efforts of a Washington-based conservative think tank, the Competitive Enterprise Institute (CEI) to bring down the Public Company Accounting Oversight Board (PCAOB) were thwarted by the Court of Appeals for the District of Columbia.

The CEI charged that the PCAOB's existence violates the separation-of-power principle afforded by the Constitution of the United States; it charged that because Congress created the board, it should be accountable to the president rather than acting as an independent entity with broad executive powers without checks and balances. PCAOB members are appointed by the Securities and Exchange Commission (SEC), not the president, but the court ruled that because the SEC chairman serves at the pleasure of the president, the president still has influence over the board.

The lawsuit, which was originally filed by Free Enterprise Fund on behalf of a small accounting firm, Nev.-based Beckstead and Watts LLP, whose audit work was criticized by the PCAOB four years ago, argues that the PCAOB is not a legal body and therefore has no purview over the firm. Managing partner Brad Beckstead, CPA writes on the firm's Web site that none of its clients have been subject to SEC enforcement action while it was the auditor of record. He states that the PCAOB's "relentless tactics and scrutiny" are forcing the firm out of business.

The PCAOB and the internal controls provisions of the Sarbanes-Oxley Act have been criticized in some circles for benefiting large accounting firms at the expense of smaller firms. And some critics say that investors are no better protected than they were before the Act was passed and the board was created. "...The PCAOB's unaccountable, unconstitutional structure gives it an incentive both to overregulate small business and to shy away from taking meaningful steps that would actually protect the investing public," writes a staff blogger on the CEI's Web site.

The New York Times reported that the court, in a 2-to-1 panel discussion, said prior Supreme Court rulings on the president's relationship with administrative agencies backed the board's set-up.