A federal appeals court on Friday upheld the constitutionality of an accounting oversight board established by the Sarbanes-Oxley Act of 2002 after the Enron and Worldcom scandals. The U.S. Court of Appeals for the D.C. Circuit voted 2-1 in rejecting a constitutional challenge to the Public Company Accounting Oversight Board.
The challenge was brought by the Free Enterprise Fund, a non-profit public interest group based in Washington, D.C., and the Nevada-based accounting firm Beckstead and Watts, which is under an ongoing PCAOB investigation.
PCAOB's five-member board is supervised by the Securities and Exchange Commission and not President George W. Bush. Michael Carvin, a partner at Jones Day who argued for the Free Enterprise Fund, said the PCAOB violates separation of powers and the Constitution's appointments clause because it does not allow adequate presidential control over the board. But the appeals court disagreed and affirmed summary judgment for the PCAOB.
Carvin, who represented Bush in litigation over the disputed Florida recount in the 2000 election, could not be reached for comment. Kenneth Starr, the former solicitor general who investigated President Bill Clinton's relationship with Monica Lewinsky, was among several attorneys joining Carvin on the briefs. Jones Day partner Christian Vergonis, who also participated on the briefs, said Jones Day was disappointed with the ruling and planned to appeal.
The PCAOB issued a statement saying the board is "gratified by the Court of Appeals' decision today, upholding the District Court's decision in the PCAOB's favor." A Baker Botts partner, Jeffrey Lamken, who heads the firm's Supreme Court and appellate practice, argued for the PCAOB. SEC Chairman Christopher Cox said in a statement that the PCAOB is a "highly effective organization whose continued existence is vital to protecting investors and furthering the public interest in the preparation of accurate and informative audit reports."
The appeals court said the Enron and WorldCom scandals exposed "serious weaknesses" in self-regulatory reporting requirements for certain publicly-held companies. The PCAOB, the centerpiece of the Sarbanes-Oxley Act passed after these scandals, registers public accounting firms, establishes auditing and ethics standards, conducts inspections and investigations, and imposes sanctions.
Writing for the majority, Judge Judith Rogers, joined by Judge Janice Rogers Brown, found PCAOB members "inferior" to and controlled by SEC commissioners, who are nominated by the president and confirmed by the Senate. "The Supreme Court has long recognized that some types of restrictions on Presidential authority within the Executive Branch are permissible, especially in the case of independent agencies," Rogers wrote. The board is considered independent and its members can be removed only for good cause, not at will. The question of whether the president is unconstitutionally removed from control of the PCAOB members is one of first impression.
Judge Brett Kavanaugh dissented in a 58-page opinion -- nearly twice as long as the majority opinion. "Never before in American history," Kavanaugh wrote, has there been an independent agency whose members are appointed and removed by another independent agency rather than by the president. "Moreover ... the very purpose of this statute was precisely to create an accounting board that would operate with some substantive independence from the SEC, not one that would be 'directed and supervised' by the SEC." Kavanaugh called the case the most important separation-of-powers litigation to reach the courts in the past 20 years.
First reported in The BLT: The Blog of Legal Times