The U.S. Supreme Court recently agreed to consider Free Enterprise Fund v. Public Company Accounting Oversight Board, a case that questions the constitutionality of the creation of the Public Company Accounting Oversight Board (PCAOB) under the Sarbanes- Oxley Act (Sarbanes-Oxley). The plaintiffs contend that the provisions of Sarbanes-Oxley that created the PCAOB violates the separation of powers clause of the U.S. Constitution.
The PCAOB was established to oversee the accounting industry. It registers public accounting firms, establishes auditing and ethics standards, conducts inspections and investigations of registered firms, and imposes sanctions. The board’s budget and processes are subject to review by the SEC, which also appoints its five board members. The SEC can also remove board members for cause.
The challenge was brought by a non-profit public interest organization whose members are subject to PCAOB regulation, and an accounting firm subject to PCAOB regulation. The plaintiffs’ primary argument is that the makeup of PCAOB violates the separation of powers clause because it does not permit adequate presidential control over the selection and removal of PCAOB members. That is, its members are not appointed by the President and cannot be removed by him.
If the plaintiffs prevail, the PCAOB would, at least temporarily, be inoperative. More importantly, it would also raise a question as to the validity of the remaining provisions of Sarbanes-Oxley, because, unlike many statutes, Sarbanes-Oxley does not contain a severability clause that would prevent the entire statute from being stricken if one section is determined to be invalid.