Costly mandates

As part of its efforts to tighten oversight of internal controls and outside auditors following accounting scandals at Enron Corp., WorldCom and Tyco International, Congress created the Public Company Accounting Oversight Board.

Under the 2002 Sarbanes-Oxley Act, the Securities and Exchange Commission, an independent federal agency, appoints the chairman and four directors of the board. The board, which has the power to subpoena documents and compel testimony from accounting firms and to discipline accountants, is funded by fees on publicly traded companies. The fees are assessed according to a company’s size.

The anti-tax group The Free Enterprise Fund and Beckstead & Watts LLP, a small Henderson accounting firm, went to court to challenge to the scheme in 2006. The plaintiffs asked whether this body is a subsidiary of the legislative or of the executive branch, pointing out that the president can neither appoint nor remove its members.

Hearing arguments in the case Monday, justices of the U.S. Supreme Court seemed to find the constitutional role of the board similarly confusing.

Justice Anthony Kennedy, whose vote could be pivotal in this case, questioned whether the board is under SEC or presidential control. “The history and tradition of boards like this is that their investigative powers are independent,” Justice Kennedy said.

The five board members each earn more than $500,000 a year, a salary designed to attract top-flight talent. But suppose the president objected to those salaries, Justice Samuel Alito asked. “Suppose the president reads about this and he says, ‘This is outrageous. I want to change it.’ How can he do that?”

Where convincing evidence of fraud has surfaced, wrongdoers have been convicted and punished. “Close-the-barn-door” laws including Sarbanes-Oxley impose high compliance costs on blameless business endeavors, crippling their ability to innovate, create wealth and generate jobs.

It is the cumulative impact of numerous such well-meaning government interventions, and particularly fear of more “reforms” to come that have business owners hunkering down like abused children waiting for the next blow. This is not a posture from which much growth, innovation and new hiring can be expected — particularly in the face of competition from foreign countries not so burdened.

The court should base its ruling on the separation of powers clause in the Constitution, of course.

But the more of Sarbanes-Oxley that can be left bleeding on the courtroom floor, the better.

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