Tuesday, July 6, 2010

Supreme Court Declares Sarbanes Oxley Removal Provisions for Accounting Board Unconstitutional

In a case interpreting the provisions of the Sarbanes-Oxley Act setting up the Public Company Accounting Oversight Board the Supreme Court has held that the removal provisions for PCAOB members violates the separation of powers provisions of the United States Constitution. However, the Court upheld the remainder of Sarbanes Oxley and allowed the PCAOB to remain.

Sarbanes-Oxley created the PCAOB to oversee accounting firms that perform the audit and accounting duties for public companies. Pursuant to Sarbanes-Oxley, the commissioners of the Securities and Exchange Commission appoint the members of the PCAOB. The President appoints the members of the SEC with the advice and consent of the Senate. Both sets of commissioners can only be removed for cause.

The Supreme Court held that the double layer of for cause terminations created insulation from presidential oversight making the President's exercise of executive authority over the PCAOB too attenuated to comport with the requirements of the Constitution's separation of powers provisions. Instead, the Court held that the termination structure impermissibly allowed Congress to encroach on executive authority. Therefore, the Court struck down the Sarbanes-Oxley provisions for the removal of the members of the PCAOB.

The unconstitutional tenure provisions of the Sarbanes-Oxley Act for the PCAOB are severable from the rest of the Act. Thus, the Court left the remainder of the Sarbanes-Oxley regulatory scheme in tact. The PCAOB remains with oversight responsibility for accounting firms providing services for public companies. With the Court's voiding of the "for cause" removal provisions, the commissioners of the SEC may terminate the PCAOB members "at will."

The name of the case before the Supreme Court was Free Enterprise Fund v. Public Company Accounting Oversight Board. To read the opinion, please see http://www.supremecourt.gov/opinions/09pdf/08-861.pdf.

For more about the decision, please see The National Law Journal, "Sarbanes-Oxley Survives High Court Ruling on Accounting Board," http://www.law.com/jsp/article.jsp?id=1202463107175&SarbanesOxley_Survives_High_Court_Ruling_on_Accounting_Board.

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