Sarbanes-oxley Law May Be Reshaped By U.s. Supreme Court Clash
The justices on Dec. 7 will consider a challenge to one of the laws central features: creation of the Public Company Accounting Oversight Board as the auditing industrys watchdog. A Nevada accounting firm and a small-government advocacy group say the board lacks the presidential control that the Constitution requires for executive branch agencies.
A decision striking down the PCAOB would leave it to Congress to re-establish the board with more oversight, setting up a legislative fight that might sweep in other aspects of Sarbanes-Oxley.
“When Congress enacts legislation to fix the board, that will provide a vehicle for opponents of the current Sarbanes- Oxley to propose amendments,” said Michael Carvin, a lawyer who will argue the case against the board for Beckstead and Watts LLP and the Free Enterprise Fund.
Lawmakers might propose amendments to shield banks from fair value accounting requirements, which require assets to be marked down to reflect market prices, or even to cut board members pay. Congress already is considering exempting small companies from audit requirements.
The PCAOB, which replaced a system of self-regulation by the accounting profession, is a private organization that performs government-type functions. The board has issued a series of accounting standards and taken 25 enforcement actions, imposing a $1 million fine on Deloitte & Touche LLP. The PCAOB draws up its own budget, sets board member salaries and funds its work by imposing fees on public companies.
SEC Oversight
Although all those actions are subject to Securities and Exchange Commission oversight, challengers say that isnt enough. Board members are appointed by the SEC, not the president, and are removable only “for cause.” The SEC is an independent agency whose members the president cant remove without cause.
“Anyone exercising significant regulatory authority needs to be ultimately controlled by the president,” said Carvin, a partner at Jones Day in Washington.
The Supreme Court said in 1935 that independent agencies are constitutional even if the president has only limited power to fire their leaders. That ruling spawned what has become known as the fourth branch of government.
Carvin called the PCAOB a fifth branch, even more removed from presidential control than other agencies.
Self-Regulatory Organizations
“The board is not an independent agency,” said Richard Pildes, a New York University law professor who filed a brief for seven former SEC commissioners supporting the board. “Its not an autonomous body. Its an entity that functions under the complete and total control of the SEC.”
At the same time, the board has a desirable level of insulation from political forces, said Jeffrey Mahoney, general counsel of the Council of Institutional Investors in Washington.
“When accounting or auditing becomes a big issue here in Washington, generally on particular issues, the push usually is in a direction that is in direct conflict with investors needs,” said Mahoney, whose group supports the board.
Unfettered Authority
In an April ruling involving the Federal Communications Commission, four justices alluded to concerns about unfettered agency authority, referring to the “separation-of-powers dilemma posed by the Headless Fourth Branch.” That opinion, written by Justice Antonin Scalia, said Congress had wrested power from “the unitary executive.”
A fifth justice, Anthony Kennedy, declined to join that section, even though he endorsed the rest of Scalias opinion.
A federal appeals court in Washington concluded 2-1 that the PCAOB was constitutional. The dissenter, Judge Brett Kavanaugh, is a former law clerk to Kennedy, who may emerge as the swing vote.