Who knew accounting could be so contentious? For all the jokes about the boring lives and personalities housed within the accounting profession,1 the work product and the promulgation of accounting standards has had a long history of brutal infighting just as entertaining, if not more so, than any professional wrestling event.2 But this should not be such a surprise. Accounting standards are housed under a complex regulatory system3 and compliance with these standards is by way of an intense enforcement apparatus.4 Such a governance system would not be built around an area of low stakes. Indeed, accounting standards have strong behavioral effects on business managers and broad economic consequences.5 Because public companies are required to use Generally Accepted Accounting Principles (GAAP) when compiling financial statements,6 accounting standards have become more important with a steady increase in worldwide ownership interest in public companies.7
Consider the array of areas touched by GAAP. Private contracts will often include covenants based on financial performance or financial ratios that are produced in compliance with GAAP.8 Some important parts of tax policy are linked to GAAP.9 Further, enforcement of some securities laws are intertwined with GAAP.10 In fact, empirical studies have shown that changes in GAAP have the potential to impact share prices broadly.11 Such a broad impact should leave no question that there a variety of interests at stake when we talk about control over the promulgation and enforcement of accounting standards.
Enter in the Sarbanes-Oxley Act of 2002 (SOX).12 SOX was passed by Congress in reaction to the wave of accounting scandals that surfaced in the early part of the decade.13 Accounting shenanigans discovered at companies such as Enron, Worldcom, and Tyco led Congress to decide it was time to make changes to the structure of accounting standard enforcement and promulgation.14 The passage of SOX led to increased oversight of internal control procedures and increased financial statement mandates on business managers of public companies.15 Not long after its passage, a survey conducted showed that the majority of CEOs of the largest companies in the United States wanted to repeal the Act.16 Many criticize Congress for acting hastily in the wake of accounting scandals17 and claim that the alleged benefits of SOX do not outweigh its costs.18 The SOX backlash has resulted in a broad movement against changes to accounting standards that has been brooding for almost a decade.19
The intense dislike for SOX bubbled over into the first major attack ? a challenge to one of the centerpieces of the act, the Public Company Accounting Oversight Board (PCAOB).20 The PCAOB was given vast power to create and enforce auditing standards for public accounting firms.21 The PCAOB can initiate investigations of accounting firms, report whether the firm is in compliance with provisions of SOX, and grant sanctions for firms that are not in compliance.22 These powers have caused consternation among public accounting firms who previously were self policed and accountable only to General Auditing Standards (GAS). After receiving a negative report, one accounting firm finally filed suit to test the legality of the PCAOB.23 The challenge in Free Enterprise Fund v. Public Company Accounting Oversight Board24 focused on the constitutionality of the appointment process for board members; the challengers claimed that in Congress's zeal to create an independent board, it gave the PCAOB vast power with no accountability to an elected official.25 To strike down the PCAOB and the rules it enforced, the accounting firm argued that separation of powers was violated because neither the President nor a proper subordinate had adequate control over the operations of the PCAOB.26 Because PCAOB members can only be removed for cause by SEC directors, and SEC directors can only be removed for cause by the President, the "double for-cause removal" procedure limits the President's ability to control the operations of the PCAOB. …