Kenneth Starr, the former special prosecutor in the Whitewater and Monica Lewinsky investigations, is attacking the constitutionality of the Public Company Accounting Oversight Board (PCAOB, or "Peekaboo") on behalf of the Free Enterprise Fund, a libertarian business group. Now dean of the law school at Pepperdine University in Malibu, Ca., Starr spoke with Directorship Editor in Chief William J. Holstein just days before the start of legal proceedings in Washington. Here are excerpts from the conversation from June:
Directorship: Why are you arguing that the PCAOB is unconstitutional?
Ken Starr: Because the PCAOB violates our basic constitutional structural principles. The composition of the board, the powers of the board and the method of the appointment of the board all violate fundamental constitutional principles. In this country, we believe in separation of powers. The fundamental problem with Peekaboo is that it violates that principle that we all learned about as schoolchildren. The Congress saw fit to provide this board with a wide array of far-reaching powers, including the power to tax, without appointment by the president and without going through or abiding by the constitutionally ordained process. So we have three basic arguments as set forth in the complaint. The three arguments are illustrations of the broader structural principles. If Congress is going to create an agency and invest it with enormous powers, it has to be attentive to and abide by fundamental constitutional principles.
Why do you think Congress got it wrong? Wouldn't you think they would ask themselves, "Is this constitutional?"
I can't answer that. It's idle for me to speculate as to why Congress might have proceeded in a way that was not constitutionally ordained. This would not be the first time in recent years that the courts have had occasion to tell Congress that [legislative] efficiency and the ease of doing business and so forth do not trump the fundamental underlying principles of a separation of powers.
Initial arguments are beginning in just a matter of days in Washington before U.S. District Court Judge James Robertson. When will the substantive arguments begin?
Not until after the court has ruled on a series of procedural objections that the board's lawyers have advanced. The court will resolve these preliminary, or threshold, issues and then set a briefing schedule for the constitutional arguments that we have advanced. So it will clearly be into late summer or perhaps early fall. [Ed. Note: No ruling was made in the June 29 hearing.]
There are huge stakes in a fight like this. Could it go to the Supreme Court?
The Supreme Court has over the years taken these kinds of issues very seriously. A challenge to the constitutionality of an act of Congress tends to be the kind of issue that gets the attention of the Supreme Court.
But it probably won't be until 2007 that we get a Supreme Court ruling?
It depends on the timing of the District Court's ruling and then any appeal to the United State Court of Appeals in Washington. So it's too soon to predict the timing of any Supreme Court action.
What is your view of the argument that if the Supreme Court finds the PCAOB to be unconstitutional, then the underlying law, the Sarbanes-Oxley Act, will have to be reopened?
It's a serious issue. I don't think I want to predict or venture to speculate on that. But it is clear that the PCAOB is a very vital part of Sarbanes-Oxley. The courts would then have to assess exactly how vital is it.
What is source of your interest in this case? Is it ideological conviction, or is it because various business interests object so strenuously to SOX and the PCAOB?
To me, it was all part and parcel of what is increasingly understood, and that is that Sarbanes-Oxley represented a hastily drafted government overreaction to a problem in the marketplace. The existing tools, including the laws that were used in criminal prosecutions including Enron -- these tools are capable of bringing dishonest folks to justice. But Sarbanes-Oxley has created an agency with enormous regulatory power that is largely unchecked and unaccountable and that has imposed burdens on the American economy.
Specifically, has the PCAOB abused its powers by conducting too many "peekaboo" audits of auditing firms?
I'm not going to get into specifics. Our challenge is predicated on the first principles that I identified before. We hear increasing voices in the marketplace saying the regulatory burdens imposed by Sarbanes-Oxley are extremely onerous and they far exceed the costs and that were predicted by its proponents four years ago. That's why there are increasing calls for Congress to reexamine Sarbanes-Oxley. Did it go too far? I'm not talking about the constitutional issue. On that count, we think it did. I'm talking about the entire array of burdens placed on companies that are trying to do the right thing and in the right way.
Besides the PCAOB, are there any other federal agencies whose members are not appointed by the president and confirmed by the Senate?
It's certainly unusual, especially gvien the wide range of powers that this agency has over vast sectors of the American economy. You can look at the SEC itself, at the Federal Communications Commission, at agency after agency. At agencies that exercise executive power, and this board clearly does, its members and its chair are typically appointed by the president and confirmed by the Senate.
Is your point that although the PCAOB oversees the accounting firms, by implication it's auditing the books of every public company?
Absolutely. The public accounting firms are a vital part of the American economy's daily operations. The oversight board has the authority to fashion rules and regulations, and the violation of those rules and regulations can effectively be treated as a crime. That's very extensive governmental power.
Who is supporting your legal challenge?
I was approached by the Free Enterprise Fund and the Competitive Enterprise Institute in Washington, which is an organization I'd worked with for some time. At the Free Enterprise Fund, I've personally known Mallory Factor for a number of years.
He's a Republican and a fundraiser for President George W. Bush. So if you win your challenge against the PCAOB, won't that embarrass a Republican administration?
I'm not sure about the political implications. This country has enjoyed its political and commercial success and stability over our two centuries plus because, even though we've been tempted to ignore them, we have been mindful of the limitations on the power of government. Regardless of who is at the helm and regardless of whether we view the sponsors as friends or allies, these constitutional principles enduringly govern--until we have a constitutional convention and agree that we want to move to a more parliamentary system in which Congress can essentially do anything it wants. But that's not our system, and I hope it never will be.
Do you consider yourself a libertarian or a conservative?
I describe myself as a friend of free markets and free enterprise. I do certainly think there is a role for government and government regulation. I have great sympathy for the libertarian agenda, in terms of maximizing human freedom and initiative. But above all, I am a structuralist who believes in the structure of the American government. If you are going to have regulation, you have to do it in the right way.
One powerful lesson to Congress from almost a generation ago, in the early 1980s, was when the Supreme Court chided Congress for having embraced a device called the legislative veto device. Congress had gotten into the habit of including in a wide variety of laws a legislative veto that at times gave a single committee of a single house the power to override an administrative agency's rules or decision-making. That's unconstitutional. The Supreme Court had to tell Congress that . . . it wasn't for the Congress to cast a veto. The ruling was a bit of a constitutional earthquake.
What is this firm Beckstead and Watts, which is listed on your side of the case against the PCAOB?
They are a small accounting firm based in Nevada that lost business as a result of the board's actions of the board. They have suffered concrete, direct injury as a result of the actions of the board.
On other issues, what do you think about the climate in Washington these days? Do you think the country is being well led?
I'm not sure I want to get into the broader political context, but I've been watching the Supreme Court fairly closely, and I'm very encouraged by this first year of the Roberts court. I think perhaps the Supreme Court is setting an example for the rest of the government in seeking to find as much common ground as possible.
Have you been following the attempts in Delaware to strip boards of directors of protection against personal liability as long as they act in good faith?
That's called the business judgment rule. It's been a mainstay of corporate law and a source of comfort to directors--that when they exercise sound judgment and as long as there's no self-dealing and there is transparency, then the director is not going to be held liable if something goes wrong. I do get the sense that the courts are watching Corporate America more closely, and yet I'm not aware of any major shifts in the tectonic plates with respect to the basic principles of law. Obviously, we don't hire the courts to go around to serve as auditors in corporate boardrooms. [But] we are seeing [litigation] increasingly brought as restive shareholders express concern and aggravation with what one or more boards may be doing.
What do you think is going on? Is it a fight for control?
The issues of corporate governance have been very lively for a number of years. If anything, issues going to the integrity of corporate operations, and the lack thereof, are giving further voice to this sense that we do need to be thoughtful about corporate governance issues. That is more the marketplace at work as opposed to what Sarbanes-Oxley represents, which is this governmental overreaction and this enormous expansion of power by the forces of regulation in Washington, D.C.
Published July 2006
