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Supreme Court rules US oversight board unconstitutional

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29th Jun 2010
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The US Public Company Accounting Oversight Board (PCAOB) established by the Sarbanes Oxley Act 2002 has been declared unconstitutional by the Supreme Court, reports our sister site AccountingWEB.com.

Following the Enron and WorldCom collapses and other allegations of auditor independence violations at Big Four firms, the Sarbanes-Oxley Act of 2002 (SOX) stipulated that auditors of listed US companies should be subject to external and independent oversight. PCAOB was set up to be that watchdog and the five-member board is appointed by the US Securities and Exchange Commission in consultation with the Federal Reserve chairman and the Secretary of the Treasury.

In 2006, US lobby group the Free Enterprise Fund (FEF) launched a legal action arguing that SOX violated  the US constitution’s principle of separation of powers because it performed an executive function without being appointed by the US president, and not subject to budgetary control by Congress.

On this point, the Supreme Court ruled 5-4 in FEF’s favour in a judgement released on Monday 28 June.

“Without the ability to oversee the Board, or to attribute the Board’s failings to those whom he can oversee, the President is no longer the judge of the Board’s conduct. He can neither ensure that the laws are faithfully executed, nor be held responsible for a Board member’s breach of faith,” wrote Chief Justice Roberts in his summary of the point at issue.

“Such diffusion of power carries with it a diffusion of accountability; without a clear and effective chain of command, the public cannot determine where theblame for a pernicious measure should fall. The Act’s restrictions are therefore incompatible with the Constitution’s separation of powers.”

Four justices disagreed with the verdict and argued that the executive appointments at PCAOB were a practical accommodation needed to support “workable government”. On the wider issue of the board’s overall validity, the court rejected broader claims to dismantle PCAOB. “The unconstitutional tenure provisions are severable from the remainder of the statute. The Sarbanes-Oxley Act remains ‘fully operative as a law’ with these tenure restrictions excised,” the court concluded.

As a result of the court’s decision, the SEC will now have the authority to remove PCAOB board SEC at will, rather than only for good cause. All other aspects of the SEC's oversight, the structure of the PCAOB, and its programs are otherwise unaffected by the court's decision. Accordingly, all PCAOB programs will continue to operate as usual, including registration, inspection, enforcement, and standard-setting activities, according to the PCAOB.

“We are pleased that the decision allows the PCAOB to continue without interruption to carry out its important mission of overseeing public company audits in order to protect investors and promote the public interest," said acting PCAOB chairman Daniel Goelzer.
 
Barry Melancon, president and CEO of the American Institute of Certified Public Accountants (AICPA), said the Supreme Court's ruling is a victory for investors and for the accounting profession.
 
“The decision effectively fixes the constitutionality of the PCAOB by making board members subject to at will removal by the SEC and, therefore, the president. It sustains the continued function of both the PCAOB and Sarbanes-Oxley. As such, the court rejected a transparent attempt to undermine the post-Enron reforms that have served our financial markets well,” Melancon said.

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