Court Throws Out PCAOB Lawsuit

A federal judge has dismissed a lawsuit seeking to invalidate the Public Company Accounting Oversight Board (PCAOB) on constitutional grounds.

The Free Enterprise Fund said in a statement that it will appeal the decision. The 2006 suit, which was also brought by the Competitive Enterprise Institute and a small audit firm, contends that the PCAOB violates the appointments clause of the U.S. Constitution because the Securities and Exchange Commission does not have the power to appoint PCAOB members.

U.S. District Court Judge James Robertson said in his opinion that "the plaintiffs have brought a facial challenge to the PCAOB, presenting nothing but an hypothetical scenario of an overzealous or rogue PCAOB investigator."

John Berlau, Director of the Center for Entrepreneurship, said, “The court said that even though PCAOB members are appointed by a multimember body - the SEC, not by the head of an agency as required by the Constitution – that this is a harmless error. But when constitutional safeguards are at stake, there are no harmless errors.”

The PCAOB was created under the Sarbanes-Oxley corporate reform legislation of 2002 to oversee the auditors of public companies.

"We are pleased with the court's decision and look forward to continuing to fulfill the mandate given us by Congress to protect the interests of investors," the PCAOB said in a statement.

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