Supreme Court to Rule on PCAOB’s Fate

The justices will hear oral arguments this fall over whether the audit firms' regulator –and the Sarbanes-Oxley Act – is constitutional.

The U.S. Supreme Court has agreed to review a case that questions the constitionality of the creation of the Public Company Accounting Oversight Board under the Sarbanes-Oxley Act. The justices will consider whether the existence of the PCAOB violates the Constitution’s separation-of-powers principle.

Formed by Sarbox, which was enacted in 2002, the PCAOB is a nongovernmental entity that sets auditing standards and regulates and regularly inspects all accounting firms that review U.S. publicly traded companies’ financials. The board’s budget and processes are subject to review by the U.S. Securities and Exchange Commission, which also approves the appointment of its five board members. According to the lawsuit filed by the Free Enterprise Fund, however, the president has no power to intervene in anything the PCAOB does. And that makes it an anomaly among U.S. agencies.

“It’s a matter of political accountability,” says Chris Vergonis, a partner at Jones Day, a law firm that has helped the plaintiffs in the case. “The president is responsive to the people, as is Congress, and they are up for reelection. But these board members never go up for reelection.”

The question over the PCAOB’s constitutionality began three years ago, when the Free Enterprise Fund, a policy group interested in promoting small government, took on the case of a small accounting firm criticized by the board after one of its inspections. The group contends that because the regulator was not a legal body under the constitution, it had no standing to perfrom such inspections or make such criticisms.

The Supreme Court will hear the merits of the case this fall, Vergonis says. The decision by the Supreme Court today to grant certification comes after protests by the Department of Justice, which contended that the case shouldn’t be heard by the high court.

A PCAOB spokesperson told CFO.com, “We remain confident that the PCAOB’s structure is constitutional and look forward to our opportunity to demonstrate that in the Supreme Court.”

If the plaintiffs are successful, then Congress would likely need to revisit the provision in Sarbox that led to the creation of the PCAOB, opening up the possibility that other parts of the law could be revisited.

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