Well, this is going to be interesting.
By a 5-4 vote, the United States Supreme Court has ruled that the way members of the Public Company Accounting Oversight Board are selected violates the appointments clause of the U.S. Constitution.
In an earlier article, the Journal of Accountancy described the arguments this way:
“Even though the PCAOB is organized as a private-sector organization, because it was created by Congress with regulatory authority, the plaintiffs argue(d), it is legally an agency of the federal government for constitutional purposes. As such, PCAOB board members are appointed officers of the government.”
The Supreme Court apparently agrees.
“By granting the (PCAOB) executive power without the Executive’s oversight, this Act subverts the President’s ability to ensure that the laws are faithfully executed — as well as the public’s ability to pass judgmeent on his efforts,” the Supreme Court ruled. “The Act’s restrictions are incompatible with the Constitution’s separation of powers.”
It’s important to note that the PCAOB itself has not been ruled unconstitutional — only the way its members are appointed. The Supreme Court emphasized that the PCAOB may continue to operate as it has in the past — and that the Sarbanes-Oxley Act remains the law of the land. The Wall Street Journal’s Brett Kendall explains it this way:
“The court, however, refused to strike down the accounting board in its entirety, saying the board’s mere existence did not violate the Constitution. “Justice Roberts said the unconstitutional provisions governing the board could be severed from the rest of the law. “He said the Securities and Exchange Commission will now have the authority to remove board members at will. Justice Roberts said Sarbanes-Oxley ‘remains fully operative as a law.'”
“The court, however, refused to strike down the accounting board in its entirety, saying the board’s mere existence did not violate the Constitution.
“Justice Roberts said the unconstitutional provisions governing the board could be severed from the rest of the law.
“He said the Securities and Exchange Commission will now have the authority to remove board members at will. Justice Roberts said Sarbanes-Oxley ‘remains fully operative as a law.'”
The AICPA was quick to chime in on what it called “a huge win” for the profession.
“The court’s ruling is a victory for investors and for the accounting profession,” said AICPA President and CEO Barry Melancon. “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.”
Added acting PCAOB Chair Daniel Goelzer: “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.”
And finally, there’s this from SEC Chair Mary Shapiro: “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. 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.”
We’ll provide a closer look at analyses of what this means for CPAs as they surface. Stay tuned.