Court rejects challenge to constitutionality of PCAOB

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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.

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