Corporate Governance

Free Enterprise Fund v. PCAOB: Regulation, the Free Market, and the Constitution (Be Careful What You Wish For)(Part 12)

By J. Robert Brown

FEF v. PCAOB is a case that tests a new model of self regulation.  To the extent that the DC Circuit strikes down the model, the Plaintiffs may well find the consequences not to their liking. 

When the suit was filed, there was no doubt hope that a decision finding the PCAOB unconstitutional would have spelled the demise in the organization. With a Republican Congress overseen by a Republican president, and the Enron scandal having receded into the past, there was little stomach for additional regulation.  A legislative fix for the PCAOB, therefore, was highly problematic.  A victor, in short, meant deregulation.    

But times have changed.  There is now a Democratic Congress and, increasingly likely, there will be a Democratic president after the 2008 elections.  They will be the ones who determine whether and how to fix the PCAOB should the DC Circuit agree with Plaintiffs. 

And fix it they will.  The era of deregulation has come to an end.  See Obama, McCain Likely to Step Up Government Role in U.S. Economy.  Accounting firms require some kind of regulatory oversight. 

So what is the most likely fix?  Not a traditional self regulatory organization, with the governance structure determined by the members.  Possibly accounting oversight could become a task of the SEC.  Counsel for Plaintiffs noted at oral argument that Congress could have avoided any constitutional challenges by transforming the PCAOB into a "traditional independent regulatory agency." 

That is the most likely answer.  The members of the board could be made subject to presidential appointment and removal only for cause.  The President would have little actual control over the activities of the agency but it would pass constitutional muster. 

Would the change in status make a difference?  Board salaries would certainly be lower, potentially impairing the quality of those appointed.  An independent agency would likely be less responsive to the private sector and would have the attendant problems associated with a traditional bureaucracy.  There would be no one to act as a check on the activities.  Would an independent agency have succumbed to the pressure from the SEC and revisited its interpretation of Section 404(b) under SOX? 

If the DC Circuit agrees with plaintiffs in this case (and it should not), the case may well take the place of Business Roundable v. SEC as the most notable Phyrric victory in the realm of securities regulation.  Mostly, though, it will severely damage efforts to link the regulation of securities activities to the private sector.   

We have posted on the DU Corporate Governance web site most if not all of the important documents on the case, including the assorted amicus filed in the appellate case.

Full post as published by The Race to the Bottom on July 09, 2008 (boomark / email).