U.S. Supreme Court Ruling Leaves PCAOB Intact in a Victory for Investors and Accounting Profession 

Published July 26, 2010

The U.S. Supreme Court’s 5-4 June 28, 2010,  decision on the constitutionality of the Public Company Accounting Oversight Board (PCAOB) leaves the agency mostly unchanged. The narrow ruling leaves the board intact and sustains the Sarbanes-Oxley Act of 2002, a major victory for investors and the profession. This ruling means that the U.S. Congress will not have to take any action and the day-to-day operation of the board will remain the same.

Barry C. Melancon, CPA, AICPA president and CEO, stated “The decision effectively fixes the constitutionality of the PCAOB by making board members subject to ‘at will’ removal by the Security and Exchange Commission 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.”

A free-enterprise group and a Nevada accounting firm had challenged the legality of the board, arguing that it violated constitutional separation-of-powers principles. The challengers argued that Congress vested the accounting board with widespread and unsupervised government power that couldn't be checked by the president or the head of a government department.

Chief Justice John Roberts wrote the majority opinion and stated that the court was severing the one unconstitutional flaw it found, regarding the removal of PCAOB members. The court emphasized that all other provisions of the Sarbanes-Oxley Act would remain in effect.

The decision will prevent any disruption to the public company audit oversight process, a critical factor in the continued strength and stability of U.S. capital markets.

Enacted in the wake of the 2001 financial debacles including Enron and WorldCom, the Sarbanes-Oxley Act established the PCAOB to oversee auditors of public companies. Sarbanes-Oxley requires that auditors of U.S. public companies be subject to register with the PCAOB and undergo regular inspections and review.

The Supreme Court decision can be found online: http://www.supremecourt.gov/opinions/09pdf/08-861.pdf. The case is Free Enterprise Fund v. Public Company Accounting Oversight Board, 08-861.




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