In mid-May of 2009, the United States Supreme Court agreed to hear a case that challenged the constitutionality of the Public Company Accounting Oversight Board (PCAOB). A product of the Sarbanes-Oxley Act of 2002, the PCAOB has existed to register public accounting firms, establish auditing and ethical standards, conduct inspections of firms, and issue citations when appropriate or deemed necessary. All public accounting firms are required to register and maintain a certain standard as required by the PCAOB.
The argument that was made by the accounting firm subject to PCAOB as well as an organization whose members are subject to PCAOB, was that the Public Company Accounting Oversight Board is unconstitutional due to several reasons. The first, and largest reason, is that the PCAOB violates the constitutionally mandated separation of powers because the Board itself is insulated from the Executive Branch of government. Essentially, Board members are very difficult to remove and Article II of the Constitution, as applied to this situation, means that the President really doesn’t have any control over the Board itself.
In addition to the main argument, the Petitioners argued that appointment by the SEC, or Securities Exchange Commission, does not qualify as appointment by Head of Department. In short, the PCAOB doesn’t adhere to this standard because the members are appointed by SEC Commissioners altogether, rather than by the Chairman himself. In addition, a 1991 Supreme Court case in which an independent agency like the SEC does not qualify as a department.
On June 28th, 2010, the Court issued a 5-4 ruling, which basically leaves the PCAOB unchanged. Day to day activities will remain the same, while the real change will be in the way the Board members can and will be removed. Now, Board members may be removed by the SEC at will, rather than just for good cause.
In addition, the Court noted that “the Sarbanes-Oxley Act remains fully operative as a law with these tenure restrictions exercised”, making clear to all that SOX is here to stay. The SEC’s Chief Accountant also noted, “It is important to understand that the PCAOB’s auditing standards, as approved by the [SEC], continue to apply. Audit firms are required to be registered with the PCAOB, and they remain subject to inspections”.
Overall, this ruling seems relatively unsurprising. Initially a new and tightly-regulated piece of legislation, more and more publicly traded companies are balking at SOX compliance and this suit may be an example of just that. Being (however marginally) upheld by the Supreme Court does seem to certify that oversight for public companies (and their accounting firms) will be around for a long time to come.
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