SEC, Justice Department Support PCAOB Constitutionality

The Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DoJ) have expressed support for the constitutionality of the Public Company Accounting Oversight Board (PCAOB).


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With the filing of a legal brief just before Labor Day, the SEC and Justice Department disputed the Free Enterprise Fund, a conservative think tank, which argued in a February lawsuit that the PCAOB’s structure violates both the appointments clause and the separation of powers principles of the U.S. Constitution. A small Nevada accounting firm, Beckstead & Watts, joined the suit.

Plaintiffs say PCAOB members are “principal” officers who must be appointed by the president, not the SEC; alternatively, the plaintiffs argue that if the board members are considered to be “inferior” officers, the SEC does not conform to “heads of departments” as laid out in the appointments clause. The complaint also says that PCAOB members are removable by the president, and therefore authority that is reserved for the executive branch is removed.

The PCAOB was created under the Sarbanes-Oxley (SOX) corporate reform legislation of 2002. The SEC unanimously selects PCAOB members and oversees the board, which in turn oversees the accounting industry. The PCAOB registers and inspects public accounting firms, issues auditing standards, and disciplines firms.

The government’s brief (www.sec.gov/news/extra/2006/2006-147_brief.pdf), filed in the U.S. District Court for the District of Columbia, argues that SEC's “pervasive oversight authority leaves no doubt of the existence of a ‘superior/inferior’ relationship for purposes of the appointments cause…”

It went on to say, “Plaintiffs similarly err in urging that the SEC should be treated as a headless non-department. In many crucial respects, the SEC functions analogously to a Cabinet-level agency, and neither the text nor the purpose of the appointments clause requires that appointments be made by an individual head rather than by the governing commissioners as a body.”

It also said that the president himself does not have the sole power to remove PCAOB members. “The general rule has long been that such officials are removable by the same subordinate officials who appointed them…” The brief further rejects the separation of powers concerns, saying that Sarbanes-Oxley “plainly does not undermine the powers of the Executive Branch or disrupt the proper balance between the coordinate branches.”


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