The U.S. Supreme Court today struck down as unconstitutional some provisions of the Sarbanes-Oxley Act that created an auditing oversight regulator but left most of the law intact, to the relief of supporters of the 2002 corporate reform law.
Sarbanes-Oxley “remains fully operative as a law,” Chief Justice John Roberts wrote in a majority 5-4 decision. The law, passed by Congress after a wave of accounting scandals involving Enron Corp., Tyco and Worldcom, requires top corporate executives to take responsibility for the accuracy of financial reports and mandates companies to have tougher internal controls. The law also created the Public Company Accounting Oversight Board to regulate auditors of corporate books.
The high court’s ruling focused on the PCAOB, finding that the way its commissioners are appointed is unconstitutional. But Roberts also said that those provisions could be separated from the rest of the law. As a result of the ruling, the Securities and Exchange Commission now has the authority to remove PCAOB board members at will. Previously, board members could only be removed for cause.
“The [agency] lost the decision, but it is as gentle a loss as you can imagine,” said Mark Olson, a former PCAOB chairman, told the Center.
Olson, now the chairman of Corporate Risk Advisors LLC, a financial institution consulting group, said that supporters of the agency are pleased that resolving the Constitutional question does not require a legislative fix. Opening Sarbanes-Oxley to legislative scrutiny would have unpredictable consequences for the law, which has been controversial from the start, he said. “I think for supporters of the PCAOB there is a strong sense of relief.”
Senate and House negotiators last week completed work to finalize a financial regulation reform bill, which is due to go back to each chamber for a vote. That legislation is largely aimed at banks, consumer finance entities, and systemically important companies, while Sarbanes-Oxley sought to restore investor confidence in all publicly-traded companies.
The case, Free Enterprise Fund v. Public Company Accounting Oversight Board, was brought on behalf of a small Nevada accounting firm that challenged the constitutionality of Sarbanes-Oxley after an unfavorable inspection from the PCAOB. The cause was taken up by the Free Enterprise Fund, a conservative group, which lost before a federal district court judge and on appeal. The plaintiffs argued that the PCAOB violates the separation of powers clause of the Constitution because board members are appointed by the Securities and Exchange Commission and not by the president, and because they cannot be fired except for cause. A majority of the justices found this argument persuasive.
However, Justice Stephen Breyer, writing for the four dissenters from the liberal wing of the court, said the PCAOB raised no constitutional concerns. “The court’s contrary holding threatens to disrupt severely the fair and efficient administration of the laws,” he wrote.