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Supreme Court Rules on the Constitutionality of SOX

7 Jul 2010

The U.S. Supreme Court ruled on June 28, 2010 that the Sarbanes Oxley Act gave too much independence to the Public Company Accounting Oversight Board, but it left the underlying law intact.

In December 2009, the Supreme Court heard oral arguments in the case Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB).  A nonprofit public interest organization and an accounting firm brought this case seeking a judgment that the Sarbanes Oxley Act violated the U.S. Constitution because Board members were not appointed or removed by the President, but by the Securities and Exchange Commission for “good cause”.

The District Court ruled in favor of the PCAOB Board and the United States which argued that the PCAOB was composed of inferior officers within the meaning of the Appointments Clause of the Constitution and that the SEC may be granted appointment powers for these officers.  The Court of Appeals for the D.C. Circuit also held in favor of the PCAOB ruling that the President’s ability to appoint and remove SEC Commissioners who, in turn, may appoint PCAOB Board members, preserved sufficient Executive branch influence to allow the President to conduct his constitutional duties.

In a 5-4 decision, the Supreme Court ruled that Congress overreached when it tried to set up the PCAOB with independence from political influence.  The Court reasoned that the PCAOB was insufficiently accountable to the people because the President of the U.S. was so far removed from the appointment process to its Board.

Rather than invalidate the whole law, however, the Court specified a fix to the law allowing SEC removal of PCAOB Board members “at will” instead of only for “good cause”.  As a result of the Court ruling, no further legislation will be required to bring the PCAOB Board’s structure within constitutional requirements.