SEC Supports PCAOB in Lawsuit Defense

The February suit challenged the constitutionality of the accounting oversight board created by Sarbanes-Oxley in 2002.

The Securities and Exchange Commission late Friday announced that it has joined a U.S. Department of Justice legal brief in support of the Public Company Accounting’ Oversight Board defense against a lawsuit challenging the PCAOB’s constitutionality.

Filed in February, the lawsuit led by the Free Enterprise Fund, a conservative nonprofit group, challenges the constitutionality of the PCAOB, the accounting industry overseer created by the Sarbanes-Oxley Act of 2002.

Under Sarbox, the SEC is charged with supervising the PCAOB. The accounting board is responsible for registering public accounting firms, issuing auditing standards, inspecting public accounting firms, and disciplining the firms and their associates.

The DOJ-SEC brief attempts to refute the lawsuits’ argument that the setup of the PCAOB violates the separation of powers principal under the Constitution as well as its appointments clause. In both cases, the lawsuit contends, problems arise because members of the SEC — and not anyone from the executive, legislative, or judicial branches of government — appoint the PCAOB’s members.

The board’s reporting structure violates the separation-of-powers principle under Article II of the Constitution, the lawsuit contended, because “the board’s wide-ranging exercise of executive or administrative power is immune from presidential supervision or control.”

The lawsuit, which notes that the PCAOB is not named by or removable by the President, also cites the Article II provisions stating that “executive power shall be vested in the President” and “he shall take care that the laws be faithfully executed.”

For their part, the DOJ and the SEC argue that Sarbox “taken as a whole, plainly does not undermine the powers of the Executive Branch or disrupt the proper balance between the coordinate branches.”

As for the Appointments Clause, the lawsuit observes that the President is empowered to name ambassadors, cabinet ministers, “and all other officers” of the nation, with the advice and consent of the Senate. An “inferior officer” of the United States must be appointed by the President, a court, or the head of a federal agency.

In response, the government’s memo contends, that the “SEC’s broad
and pervasive oversight renders implausible plaintiffs’ insistence that the Board, by its nature, impermissibly derogates Executive Branch authority.”

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