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Legal action launched against Sarbanes-Oxley. By Louise Birkett

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13th Feb 2006
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A US free market group has launched a legal action against the Public Company Accounting Oversight Board (PCAOB), set up by the Sarbanes-Oxley Act, saying it's unconstitutional.

The Free Enterprise Fund (FEF) is arguing that Sarbanes-Oxley violates the US Constitution's mandated separation of powers among the three branches of government.

If the lawsuit goes in FEF's favour then Sarbanes-Oxley could be invalidated. Opponents have been calling for it to be sent back to Congress for revision but the Act itself has not been challenged until now.

FEF is arguing that the five members of the PCAOB have unchecked powers which violate the US's doctrine of separation of powers. This is because the board performs an executive function but members are not appointed by the President and cannot be removed by him. Also, Congress cannot control its budget.

Instead, the PCAOB members are appointed by the Securities and Exchange Commission, an independent federal agency and the board is funded by fees paid by publicly traded companies according to their size.

FEF chairman Mallory Factor said Sarbanes-Oxley was a gross overreaction to the Enron and WorldCom scandals and added: 'With a recent University of Rochester study concluding that the total effect of Sarbanes-Oxley has reduced the stock value of American companies by a staggering $1.4 trillion dollars, it is now clear that the costly regulatory burdens imposed by this legislation absolutely outweigh its benefits.

"The PCAOB and the Sarbanes-Oxley Act raise unconstitutional barriers to needed liquidity, discourage entrepreneurship and innovation, and hinder US competitiveness by denying access to needed capital. Further, the high cost of compliance that disproportionately affects smaller public companies is having long-term, exponential negative implications for our economy.

"Enforcement efforts should focus on aggressive prosecution of bad actors under existing anti-fraud laws rather than imposing costly and largely ineffective procedural requirements on all public companies.'

Michael Carvin, FEF's legal counsel, said: "In brief, the PCAOB is not accountable to any elected official or the citizens subject to PCAOB regulation."

Other legal experts behind the lawsuit include Kenneth Starr, the special prosecutor in the Monica Lewinsky case, which threatened former President Bill Clinton with impeachment.

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