Lawsuit contends PCAOB is unconstitutional

BVWireIssue #52-1
January 3, 2007

A creature of the Sarbanes-Oxley Act of 2002, the Public Company Accounting Oversight Board (PCAOB) has generated almost as much controversy as the accounting scandals which helped create it. Last October, for example, PCAOB’s standards on auditing stock options received praise (see article). And just last month, the PCAOB proposed its revised standards on auditing internal controls over financial reporting; click here to read the new release.

But a recent article accused the PCAOB of “backing down” from its watchdog role. The Board was supposed to stop auditors from “blinding themselves” to corporate fraud because they were “raking in billions of dollars from the sale of consulting services” to their clients—“but now, the oversight board is delaying an audit rule that would have forced accounting firms to stop selling tax advice” to their audit clients.

And then, just before the holidays, a federal judge heard arguments that the PCAOB is unconstitutional because it is unaccountable to government. In their lawsuit, the Free Enterprise Fund and the Competitive Enterprise Institute contend that the five-member Board is a “quasi-private organization” that has greatly enriched auditing firms by creating “needlessly complicated” rules—costing the economy over $35 billion. “At the same time,” CEI attorney Hans Bader tells BVWire, “it has repeatedly disciplined small accounting firms for failing to exhaustively document the value of insignificant assets of small businesses, driving up the costs of audits.” To read the challenger’s arguments, click here.

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