Public Company Accounting Oversight Board - Constitutional Challenge

Constitutional Challenge

In February 2006, the Free Enterprise Fund and Beckstead and Watts, LLP (a small Nevada-based accounting firm) filed a lawsuit in federal court challenging the constitutionality of the PCAOB. According to the lawsuit, the provision of the Sarbanes-Oxley Act establishing the PCAOB violates the "Appointments Clause" of the U.S. Constitution, since the PCAOB members should be viewed as "officers of the United States" because of the public purposes PCAOB serves, and, as such, must either be appointed by the President of the United States, with the advice and consent of the U.S. Senate, or by the "head" of a "department," whereas PCAOB's board is appointed by the SEC, rather than by the Chairman of the SEC. The lawsuit also challenged the PCAOB as violating the Constitution's separation of powers, since the organization has quasi-executive, quasi-legislative and quasi-judicial functions.

On August 22, 2008, the U.S. Court of Appeals for the District of Columbia Circuit upheld the PCAOB as constitutional. The court found that board members are inferior officers not required to be appointed by the President, and that the President retains sufficient control of the Board via the SEC that the Board does not violate the separation of powers.

The United States Supreme Court granted certiorari on May 18, 2009, to consider three questions:

1. Whether the Sarbanes-Oxley Act of 2002 violates the Constitution's separation of powers by vesting members of the with far-reaching executive power while completely stripping the President of all authority to appoint or remove those members or otherwise supervise or control their exercise of that power, or whether, as the court of appeals held, the Act is constitutional because Congress can restrict the President's removal authority in any way it "deems best for the public interest."
2. Whether the court of appeals erred in holding that, under the Appointments Clause, PCAOB members are "inferior officers" directed and supervised by the, where the SEC lacks any authority to supervise those members personally, to remove the members for any policy-related reason or to influence the members' key investigative functions, merely because the SEC may review some of the members' work product.
3. If PCAOB members are inferior officers, whether the Act's provision for their appointment by the SEC violates the Appointments Clause either because the SEC is not a "Department" or because the five commissioners, acting collectively, are not the "Head" of the SEC.

Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board, et al. was argued on December 7, 2009. In addition to the PCAOB, the United States (represented by Solicitor General Elena Kagan) also appeared as a respondent in the case and argued separately, defending the constitutionality of the Sarbanes-Oxley Act. Thirteen amici, ranging from libertarian think-tanks like the Cato Institute to managers of state public-employee pension funds, filed briefs in the case.

On June 28, 2010, in a five-justice majority opinion written by Chief Justice John G. Roberts, the Supreme Court found the appointment provisions of the act constitutional, but struck down the for-cause removal provision. The Court did not accept petitioners' argument that the constitutional infirmity made all of the Board's prior activity unconstitutional; rather, it simply severed the for-cause removal clause from the rest of Sarbanes-Oxley, leaving the Board itself intact.