Merits Brief Challenging Constitutionality of PCAOB Focuses on Separation of Powers and Appointments Clause Violations

The audit firm challenging the constitutionality of the PCAOB has taken direct aim at the Board’s constitutional status in its merits brief filed with the US Supreme Court. The firm contends that, in creating the Board, the Sarbanes-Oxley Act violated two basic tents of the Constitution: separation of powers and the appointments clause. The case is before the Supreme Court on a grant of certiorari of a split panel ruling of the DC Circuit Court of Appeals that the PCAOB’s creation was constitutional. The Supreme Court will hear oral arguments this Autumn and a decision is expected during this term. (Free Enterprise Fund and Beckstead & Watts v. PCAOB, Dkt. No. 08-861).

In creating what the brief calls a novel “Fifth Branch” agency, the PCAOB, to regulate the accounting profession, Congress violated the separation of powers principle for three reasons. First, by vesting the power to appoint, remove and review the work of Board members in the SEC, the Act completely and impermissibly burdened the President’s power to control or supervise executive officials. Second, the Act unconstitutionally enhanced Congress’ powers because the SEC is subject to congressional influence and the Board itself is more subservient to Congress than to the President. Third, Congress had no overriding need, or even a legitimate reason, to upset the constitutional balance of powers. In addition, the brief contends that, under the Appointments Clause, Board members exercising widespread governmental power are principal officers of the US who must be appointed by the President with the advice and consent of the Senate.

In arguing that the Board’s creation ran afoul of the separation of powers doctrine, the brief noted that the PCAOB exercises broad and coercive governmental power by prescribing corporate auditing standards, investigating accountants’ business activities, and funding its own operations by levying a tax on public corporations. In the Act, argued the firm, Congress completely circumvented basic controls on governmental power and the accountability of elected representatives; and thus violated the basic precept of separated powers.

The Act impermissibly impedes Presidential supervision of executive functionaries in order to enhance congressional influence, charged the brief, giving the President no ability to control or supervise Board members with no legitimate justification, let alone an overriding need, for this intrusion.

According to the brief, precluding the President from appointing or removing Board members is, standing alone, a violation of the constitutional admonition that the President’s duty to execute the laws necessarily includes the power of appointment and removal of executive officers. Since it is not possible to control or supervise an official whom one can neither appoint nor remove, reasoned the brief, Congress’ decision to strip the President of both of these essential tools necessarily means that the Act sufficiently deprives the President of control over the officer to interfere impermissibly with his constitutional obligation to ensure the faithful execution of the laws.

The brief broadly contends that Congress has thoroughly plugged each and every potential avenue by which the President could hope to even indirectly control or influence the Board. For example, the President has no power to review the Board’s work product, said the brief, and has no influence over the Board’s finances. The Board raises its own money outside of the congressional appropriations process through the direct taxation of registered corporations, and the President has no power to review the Board’s budget.

On the other hand, Congress has plenary authority over Board members’ continued employment and salaries and the Board’s very existence. Thus, while completely preventing the President from performing his duty to execute the laws, the Act directly involves the legislature in enforcing the laws it passes, which the brief calls the ``central tyrannical evil that separation of powers was most directly designed to prevent.’’

The brief also said that the SEC’s purported control over the Board cannot cure the President’s deprivation. The fatal flaw in the argument that the President can exercise control of the Board through the appointment of SEC commissioners is that even the theoretical ability of the President to effectuate a Board member’s removal over the objection of the SEC requires Senate confirmation of any replacement commissioners, thus violating the basic prohibition against Congress gaining a role in the removal of executive officials.

Upholding the Board here, warned the audit firm, would authorize Congress to reduce the President to the largely ``symbolic and hortatory role’’ of appointing bipartisan independent commissioners who, in turn, would appoint independent board members who do the actual governing but could not be removed or supervised by the President in any circumstance, and where any indirect removal effort would necessarily involve the Senate’s participation.

In addition to violating Article II’s general grant of executive power, the Act also violates the specific requirements of the Appointments Clause, and its core purpose of ensuring accountability. In the view of the audit firm, Board members are plainly principal officers who should not be appointed without the President and Senate taking responsibility. The exception authorizing Congress to vest the appointment of inferior officers in the Heads of Departments was added at the end of the constitutional debate merely as an administrative convenience to prevent the Senate from being overwhelmed by having to confirm all officers.

Board members are principal officers because every defining attribute of the Board demonstrates that it is an independent entity with an autonomy and authority requiring that its members be selected and confirmed by the politically accountable President and Senate. Equally important, the Board has the unique power to directly tax designated entities to fund itself, thus both vesting it with tremendous power and freeing it from the normal constraints and oversight inherent in the congressional budget process. It is not remotely plausible, argued the brief, that the Framers would authorize the taxing power to be exercised by officers appointed without any input by the executive branch and Senate consent.

The SEC’s restricted after-the-fact review of Board sanctions and rules does not constitute direction or supervision because it does not extend to Board members personally, but is limited to their judgments. The Appointments Clause deals with “Officers,” not office , said the brief, making it clear that for an officer to be inferior, a superior must directly supervise the officer, and not just review the substantive work product of the office. Moreover, the SEC’s passive power to review Board rulemaking and sanctions only allows it to veto mistakes by the Board, but not to proactively prescribe how Board members should act, particularly in case-specific enforcement. It is therefore neither “direction” nor “supervision.”

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