Court rejects challenge to constitutionality of PCAOB

On Friday, the U.S. Appeals Court for the District of Columbia Circuit in a vote of 2-1 upheld the constitutionality of the Public Company Accounting Oversight Board (PCAOB). The Board was created five years ago by the Securities and Exchange Commission (SEC), responding to a mandate in the Sarbanes-Oxley Act of 2002. The Court rejected the claim by Beckstead & Watts LLP, a Nevada accounting firm, and the Free Enterprise Fund in Free Enterprise Fund v. Public Company Accounting Oversight Board that the Board violates the separation of powers clause of the U.S. Constitution.

A lower court had rejected the Beckstead and Watts LLP suit last year.

The plaintiffs argued that the PCAOB - endowed with subpoena power and the authority to discipline accountants - violated the separation of powers requirement because its five members aren't appointed by the president, cannot be removed by him, and Congress does not control the board's budget.

The Court ruled that the PCAOB "does not encroach upon" the Constitution nor does it violate the separation of powers clause.

PCAOB members are "not required to be appointed by the president," Judge Judith Rogers wrote in the Court's majority opinion, Bloomberg reports.

In his dissent, Judge Brett Kavanaugh said the PCAOB's structure unconstitutionally restricts the president's appointment and removal powers.

The SEC appoints the board's five members, and approves the PCAOB's budget and rules before they take effect.

SEC Chairman Christopher Cox issued the following statement regarding the decision:

"The decision today of the Court of Appeals for the District of Columbia Circuit upholding the constitutionality of the Public Company Accounting Oversight Board is welcome news for the Commission, investors and U.S. capital markets.

"The creation of the PCAOB was a central feature of the Sarbanes-Oxley Act, which was enacted in part in response to repeated failures of audit effectiveness and loss of investor confidence. The Commission believes that the PCAOB is a highly effective organization whose continued existence is vital to protecting investors and furthering the public interest in the preparation of accurate and informative audit reports."

Dennis Beresford, an accounting professor at the University of Georgia and former chairman of the Financial Accounting Standards Board, said, according to Bloomberg, that the ruling removes "some uncertainty hanging over the PCAOB, especially because there were predictions the decision would go the other way."

Beckstead will appeal either to the U.S. Supreme Court or seek a hearing before the full appeals court, an attorney with Beckstead's law firm said today.

It will be difficult for them to win in appeal, however, says Donald Langevoort, a law professor at Georgetown University in Washington and a former SEC attorney, Bloomberg reports. "Courts are loath to strike down an agency created by Congress."

Beckstead and Watts, LLP was criticized by the PCAOB in 2004 for its audits.

You may like these other stories...

Public Company Accounting Oversight Board (PCAOB) inspectors are finding “significant audit deficiencies” in the area of revenue, the US audit watchdog stated in a staff audit practice alert issued on Tuesday.The...
The Public Company Accounting Oversight Board (PCAOB) is interested in what you have to say about auditing accounting estimates and fair value measurements.The US audit regulator on Tuesday issued for public comment a staff...
While audits of broker-dealers showed some improvement last year compared to previous years, 71 of 90 broker-dealer audits inspected by the Public Company Accounting Oversight Board (PCAOB) in 2013 were still found to have...

Already a member? log in here.

Upcoming CPE Webinars

Sep 18
In this course, Amber Setter will shine the light on different types of leadership behavior- an integral part of everyone's career.
Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.
Sep 30
This webcast will include discussions of important issues in SSARS No. 19 and the current status of proposed changes by the Accounting and Review Services Committee in these statements.
Oct 23
Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.