UPDATE: Supreme Court rules PCAOB violates Constitution's separation of powers principle

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The U.S. Supreme Court this week ruled that the Public Company Accounting Oversight Board (PCAOB) violates the U.S. Constitution's separation of powers principle because board members are not appointed by the president.

In a 5-4 decision, the court stated that the president must have more power to remove PCAOB members. The five-member board is appointed by the U.S. Securities and Exchange Commission after consultation with the Federal Reserve System's chairman of the board of governors and the Secretary of the Treasury. 

"We are pleased that the decision allows the PCAOB to continue without interruption to carry out its important mission of overseeing public company audits in order to protect investors and promote the public interest", said Daniel L. Goelzer, PCAOB acting chairman.

The consequence of the court's decision is that PCAOB board members will be removable by the SEC at will, rather than only for good cause. All other aspects of the SEC's oversight, the structure of the PCAOB, and its programs are otherwise unaffected by the court's decision. Accordingly, all PCAOB programs will continue to operate as usual, including registration, inspection, enforcement, and standard-setting activities, according to the PCAOB.

Today's decision stems from Free Enterprise Fund v. Public Company Accounting Oversight Board, in which Beckstead & Watts LLP, a Las Vegas accounting firm, the Free Enterprise Fund, and Competitive Enterprise Institute claimed that the PCAOB violates the Appointments clause of the U.S. Constitution and the principle of separation of powers. The 2006 lawsuit failed in the U.S. Appeals Court for the District of Columbia Circuit in 2008, when a panel of judges ruled that the PCAOB was in fact constitutional by a vote of two to one.

The PCAOB is a product of the Sarbanes-Oxley Act of 2002 (SOX), and is charged with overseeing auditors of public companies in order to protect investors and the public interest by promoting informative, fair, and independent audit reports. The Act required that auditors of U.S. public companies be subject to external and independent oversight.

"I am pleased that the court has determined that the board's operations may continue and the Sarbanes-Oxley Act, with the board's tenure restrictions excised, remains fully in effect. The PCAOB is a cornerstone of the Sarbanes-Oxley Act and serves a critical role in promoting investor protection and audit quality", said SEC Chairman Mary L. Schapiro.  "We look forward to continuing to work with the board in connection with its mission to oversee auditors in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports."

Barry Melancon, president and CEO of the American Institute of Certified Public Accountants (AICPA), said the Supreme Court's ruling is a victory for investors and for the accounting profession.

"The decision effectively fixes the constitutionality of the PCAOB by making board members subject to at will removal by the SEC and, therefore, the president. It sustains the continued function of both the PCAOB and Sarbanes-Oxley. As such, the court rejected a transparent attempt to undermine the post-Enron reforms that have served our financial markets well", Melancon said.

Officials with the Center for Audit Quality (CAQ) said they were pleased that the decision will allow the continued operation of the PCAOB without any changes or legislative action.

"The PCAOB was put in place to achieve the goals Congress embodied in SOX", said Cindy Fornelli, CAQ executive director.  "Evidence demonstrates that audit quality and investor confidence have improved since the board's creation. The decision will prevent any disruption to the key activities of the PCAOB, including setting auditing standards and the public company audit oversight process - critical factors in the continued strength and stability of our capital markets."

The National Association of State Boards of Accountancy (NASBA) said in a statement that the Supreme Court's reasoning in the case reflects arguments the association made in an amicus curiae brief it filed on behalf of the PCAOB. NASBA called the ruling a "substantial victory" for the PCAOB, as well as for NASBA and for state boards of accountancy.

"With this cloud of uncertainty lifted, the PCAOB can devote more of its attention to independently protecting the public at the federal level, while NASBA's state boards of accountancy continue to do so at the state level", said David A. Costello, CPA, president and CEO of NASBA.

The Supreme Court's full decision here.

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