Business Interests Challenge Oversight
Accounting Board Regulates Illegally, Lawsuit Claims

By Kathleen Day
Washington Post Staff Writer
Friday, December 22, 2006

A business group argued in U.S. District Court yesterday that a panel created by Congress to police the accounting industry lacks sufficient oversight by the White House.

The five-member Public Company Accounting Oversight Board acts as a federal regulator, deciding whether accounting firms are fit to audit the books of publicly traded companies, without having been appointed by the president and confirmed by the Senate as the Constitution requires, the plaintiffs argued.

Lawyers for the accounting board, created in 2002 under the Sarbanes-Oxley Act, and the Justice Department argued that the board is legal because it is supervised by the Securities and Exchange Commission, a federal agency whose members are appointed by the president and confirmed by the Senate. SEC Chairman Christopher Cox has said the agency supports the Justice Department's position.

The legal battle is part of an attempt by business groups to roll back Sarbanes-Oxley, which Congress passed in response to widespread corporate frauds such as those at Enron and WorldCom.

At the heart of those frauds were financial statements that presented an inaccurate picture of each company's health to investors and employees, who lost tens of billions of dollars after the problems were made public and the companies' stock prices plummeted. In some cases, stock became worthless.

Among the investor protections created under Sarbanes-Oxley was a board to oversee the accounting industry. The idea was that the board would help to ensure that audits of companies are accurate and not just rubber stamps without meaning.

Lawyers attacking the legality of the accounting oversight board represent Beckstead & Watts, an accounting firm under investigation by the board, and the Free Enterprise Fund, a nonprofit group that advocates "limited government" and whose chairman, Mallory Factor, is a major Republican fundraiser.

Attorney Michael A. Carvin, who presented the oral argument against the accounting board, argued before the Florida Supreme Court on behalf of George W. Bush in the dispute over recounting votes in the 2000 presidential election. Co-counsel Kenneth W. Starr was independent counsel in the Whitewater investigation of President Bill Clinton.

Carvin said the SEC can "veto" the board's rules and "stop them from doing bad things." But, he said, "that's not supervision."

Jeffrey A. Lamken, a lawyer hired by the accounting board, said Congress gave the SEC "broad" authority to supervise the board, including the power to take away its authority in any investigation.

U.S. District Judge James Robertson said he would decide the case as soon as possible.

The case pits people who supported President Bush's reelection against the White House policy of supporting the accounting board. And it puts the board in a difficult situation: The panel privately has chafed at SEC oversight but must now publicly argue that it is that oversight that makes it beholden to the president, and therefore legal.

This week the board, under pressure from the SEC, proposed a relaxed set of rules to implement another section of Sarbanes-Oxley, which requires companies to document, and an outside auditor to confirm, that adequate internal controls are in place to ensure that financial statements filed with the SEC are accurate.