A new lawsuit by the Free Enterprise Fund going to the Supreme Court soon challenges the constitutional validity of a certain provision in the Sarbanes-Oxley Act.
The lawsuit claims the Sarbanes-Oxley Act violates constitutional requirements since it gives the Public Company Accounting Oversight Board regulatory powers over the accounting industry, and yet its members are not appointed by the President. They argue that this is a violation of the separation of powers specified in the constitution that leaves the President with insufficient control over what could be considered an executive function.
But to me it sounds like a technicality; pointed at those clamoring for the downfall of SOX. Since SOX lacks a severability clause, if the lawsuit prevails then the entire Act would be thrown out, not just the part about PCAOB appointees. This is probably what the Free Enterprise Fund is planning on.
Opponents of Sarbanes-Oxley are many and they’d love to see SOX thrown out. Ron Paul, to name one, argues that SOX compliance gives U.S. corporations a competitive disadvantage with foreign markets. Both foreign an U.S. firms that do not wish to endure the intrusive compliance regulations of SOX are deregistering from the U.S. stock exchange. This is understandable since the costs SOX imposes have averaged at $5.1 million in compliance costs. The year after it became law, the number of companies de-registering from the stock exchange tripled.
The Act also seems to discourage the initial public offering market from growing. Startups can hardly afford the SOX compliance costs in order to quality for stock market registration. But without investors these companies don’t have much of a chance to grow.
On the other hand, many of these companies fleeing from stock exchange registration because of SOX may have something to hide. In those cases, SOX is doing its job of preventing companies that employ crooked accounting practices from swindling mom and pop investors.
It remains to be seen how the Supreme Court will rule on the lawsuit and, if the lawsuit prevails, how it will end up reforming all aspects of the Sarbanes-Oxley Act.
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