Supreme Court will hear challenge to PCAOB

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A suit challenging the constitutionality of the Public Accounting Oversight Board (PCAOB) will be on the docket of the U.S. Supreme Court when it reconvenes next fall. The plaintiffs in the case, Free Enterprise Fund v. Public Company Accounting Oversight Board, Beckstead & Watts LLP, a Las Vegas, Nevada accounting firm, and the Free Enterprise Fund, claim that the Board violates the Appointments clause of the U.S. Constitution and the principle of separation of powers. The 2006 lawsuit failed last year in the U.S. Appeals Court for the District of Columbia Circuit, where a panel of judges ruled that the PCAOB was in fact constitutional by a vote of two to one.

If the plaintiffs are successful, Congress would likely need to revisit the provision in Sarbanes Oxley that established the PCAOB, which could potentially mean reexamining the entire law, according to CFO magazine. It could potentially affect the ability of the Securities and Exchange Commission, which reviews the rulings of the PCAOB, to take action against accounting firms.

Created by the Sarbanes-Oxley Act of 2002, the PCAOB is a private, nonprofit corporation authorized to inspect accounting firms annually or triennially depending on the number of audit reports generated by the firm. The Board is charged with protecting investors by "promoting informative, fair, and independent audit reports." PCAOB board members are appointed by the SEC. The appointments are not made by the President and approved by the Senate in the same way as the IRS commissioner, the Federal Reserve governors, and the Chairman of the SEC.

In an op-ed column in The Wall Street Journal, Kenneth Starr and Viet Dinh, attorneys for the plaintiffs, quote the dissenting opinion of Judge Brett Kavanaugh of the D.C. Circuit Court who "called our challenge to the PCAOB 'The most important separation-of-powers case regarding the president's appointment and removal powers to reach the courts in the last 20 years.'"

While taking issue with the PCAOB provision in Sarbanes-Oxley, Starr and Dinh also stress the potential cost of the Board's actions to the economy and charge that the PCAOB wields great power over accounting firms and public companies. They say that:

In writing the 2002 law, Congress created a striking Constitutional anomaly – a powerful executive branch agency with a structure that gives the President almost no say over its policies. With minimal oversight and no real supervision, the PCAOB decides which accounting firms to inspect and how to conduct an investigation. It interprets sections of Sarbanes-Oxley, deciding, for instance, what is an "internal control" under the act's Section 404. It was also given the power to levy an "accounting support fee," essentially a tax on all public companies, to fund its operations.

At the completion of the trial in the Appeals Court in August 2008, the PCAOB said in a statement that the ruling was consistent with the position of the PCAOB, the U.S. Government through the Department of Justice, and the Securities and Exchange Commission (SEC), seven former SEC chairmen, the Council of Institutional Investors, TIAA-CREF, AFL-CIO, and several public employee pension funds.

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