Sarbanes-Oxley Auditing Board Ruled Unconstitutional

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The Supreme Court on Monday struck down part of a Sarbanes-Oxley Act of 2002 that created a national board that polices auditors of public companies.

More specifically, the high court ruled that the Public Company Accounting Oversight Board (PCAOB) violated the constitutional requirement on the separation of powers among the branches of government.    The court stated the president, or other officials appointed by him, must be able to remove members of a board that was created to tighten oversight of internal corporate controls and outside auditors.

In 2002, in response to the Enron and WorldCom accounting scandals, Congress enacted the Sarbanes-Oxley corporate reform law that established certain accounting and auditing requirements for corporate America.   Further, Congress created the board to replace the accounting industry’s own regulators.   The board has power to compel documents and testimony from accounting firms, and the authority to discipline accountants.

Board members are appointed by the U.S. Securities and Exchange Commission and can only be removed by the SEC for cause.  The board, set up as a quasi-private agency, has the power to impose rules and to inspect and fine accounting firms.    The board is funded through fees it collects from public companies. It inspects thousands of auditors, including the Big Four accounting firms: Ernst & Young LLP, KPMG, PricewaterhouseCoopers and Deloitte & Touche LLP.

Although, the court’s ruling on Monday held that the board violated the U.S. Constitution’s separation of powers principle, it also held that the law does not violate the Constitution’s appointments clause and unconstitutional provisions can be separated from the rest of the law.

Therefore, the Sarbanes-Oxley law will remain in effect with one change.  The Public Company Accounting Oversight Board will continue as before, but the Securities and Exchange Commission now will be able to remove board members at will.

Some legal experts say that this decision could put pressure on Congress to revisit the Sarbanes-Oxley corporate reform law and potentially create changes in the reporting duties of companies.

This decision was based on case brought before the high court in 2006 by Free Enterprise Fund and a small Nevada accounting firm, which argued that the law unconstitutionally stripped the president of power to appoint or remove board members or to supervise their activities.    The recent decision was made by the Supreme Court after a federal judge and a U.S. appeals court rejected the challenge.

Anna Timone (195 Posts)


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