In a major separation-of-powers ruling, the U.S. Supreme Court on Monday said that members of an accounting oversight board created as part of the Sarbanes-Oxley Act were too insulated from presidential authority to be part of an accountable executive branch.
Under the law, meant to respond to the Enron and WorldCom accounting scandals, the new board was given powers to register, inspect and, if necessary, discipline public accounting firms. Its five members were appointed by the Securities and Exchange Commission, whose members, in turn, are appointed by the president. But members of both bodies can only be removed for "good cause," not for policy disagreements.
That "double-for-cause" protection violates the Constitution, wrote Chief Justice John Roberts Jr. for the Court, because it puts the board members beyond the president's reach for removal. The ruling came in the case of Free Enterprise Fund v. Public Company Accounting Oversight Board and represents a defeat for Solicitor General Elena Kagan, who defended the constitutionality of the board. She argued that the president had sufficient authority over the SEC to keep the board accountable.
"The President cannot 'take care that the laws be faithfully executed' if he cannot oversee the faithfulness of the officers who execute them," said Roberts. "This contravenes the president's 'constitutional obligation to ensure the faithful execution of the laws.'"
Quoting President Harry Truman's famed saying, "The buck stops here," Roberts said that, if the accounting board were allowed to exist in its current state, "the President could not be held fully accountable ... the buck would stop somewhere else."
But allaying fears that a decision striking down the board would threaten to upend all of Sarbanes-Oxley, Roberts said the rest of the law would remain in place, and even the accounting board could continue its work without the removal provision.
In a dissent read in part from the bench, Justice Stephen Breyer said the board's appointment process does not hamper presidential power, adding that the ruling "threatens to disrupt severely the fair and efficient administration of the laws." Breyer included a 35-page appendix listing 48 agencies whose officials might be seriously affected by the decision, including members of the military and administrative law judges. He said the decision could have the effect of "a computer virus running through the halls of government." Breyer was joined by Justices John Paul Stevens, Ruth Bader Ginsburg and Sonia Sotomayor.
Cindy Fornelli of the Center for Audit Quality applauded the Court's effort to preserve the board in spite of the unconstitutional feature. "The decision will prevent any disruption to the key activities of the PCAOB including setting auditing standards and the public company audit oversight process, critical factors in the continued strength and stability of our capital markets."
Susan Hackett of the Association of Corporate Counsel, said the ruling leaves in place the rest of Sarbanes-Oxley, so "corporate lawyers should have the confidence to continue to focus their clients on compliance with the sweeping reforms contained in Sarbox."
The case began when a small Nevada accounting firm, Beckstead and Watts, was being investigated by the accounting board. Beckstead, joined by the Free Enterprise Fund, a nonprofit public interest organization, sued the board in federal court in Washington, D.C. The district court ruled against the challengers in 2007, and a divided three-judge panel of the U.S. Court of Appeals for the District of Columbia affirmed in 2008.