It would surely exceed the ironic if the Sarbanes-Oxley Act of 2002, passed to help prevent market scandal and turmoil, were to meet its demise even as the current financial crisis threatens economic upheaval on an unprecedented scale.

But that’s not outside the realm of possibility following August’s split decision of the D.C. Circuit in Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB), a case of first impression challenging the Board’s constitutionality.

“There’s no severability clause in Sarbanes-Oxley, so if the PCAOB falls, so does the rest of the statute,” says Stuart Stein, who leads Hogan & Hartson’s financial services and corporate governance practice.

For the time being, however, Sarbanes-Oxley is safe–if barely so. Although the majority opinion of Judges Judith Rogers and Janice Rogers Brown in Free Enterprise upheld the law’s constitutionality, Judge Brett Kavanaugh’s blistering 58-page dissent–twice the length of the majority ruling–creates the real specter of an en banc hearing by the court’s 10 active judges, at which points all bets will be off.

“Never before in American history,” Kavanaugh wrote, “has there been an independent agency whose heads are appointed by and removable only for cause by another independent agency rather than by the president.”

Presidential Power

Indeed, it is the unique nature of the PCAOB that has led to the argument that it violates separation of powers and the Constitution’s appointments clause because it is not subject to adequate presidential supervision. Congress made the PCAOB subject to the comprehensive control of the Securities & Exchange Commission (SEC), the members of which are appointed by the president with the advice and consent of the Senate and are subject to removal by the president for cause. The president also selects the SEC’s chair, who serves at his pleasure.

It is the SEC, however, that sets the PCAOB’s rules and procedures and has the power to remove any of its members, overturn any of its sanctions and limit or relieve the Board of any of its powers.

“The PCAOB is an unusual entity different in kind than any other created by Congress, for although it has significant powers similar to regulatory agencies all over Washington, its members are not appointed by or removable by the president, nor subject to his control in any other way,” says Christian Vergonis, a member of the Jones Day legal team that represented Free Enterprise, a non-profit public interest group. “When asked to do so in court, the government was unable to offer any analogies.”

But as the majority saw it, the PCAOB’s members were not “principal officers” whom the president must appoint under the appointments clause. Rather, they were “inferior” to and controlled by SEC commissioners, themselves “principal officers” properly appointed by the president.

“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.

Roadmap to Appeal

But Kavanaugh disagreed.

“The very purpose of [Sarbanes-Oxley] 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,” he wrote.

Blessing the PCAOB, Kavanaugh added, would give Congress the green light to model other agencies–with a similar lack of political accountability– after it.

Some observers are of similar mind.

“If the government wins, I can certainly see it making the case to employ the PCAOB model elsewhere,” says Nicolas Morgan, a partner at DLA Piper.

However that may be, Kavanaugh’s reasons have clearly made an impression on the rest of the court.

“The dissent is a definitive roadmap for an appeal or an en banc hearing,” Morgan says.

Indeed, after the plaintiffs requested an en banc hearing, the court evidenced a decided interest in the application by asking the government to file a response.

“There’s no requirement for the other side to respond to a request for an en banc hearing unless the court asks them to respond,” Vergonis says. “And what the court’s request means is that it is seriously thinking about taking the case en banc.”

En Banc

If the court decides to hold such a hearing, there will be another lengthy round of proceedings, including full briefings and oral arguments. Vergonis has indicated that if the court refuses his clients’ request for an en banc hearing, they will petition the Supreme Court for a hearing.

At press time, the decision on holding an en banc hearing was not expected until as late as year’s end. Meanwhile, speculation about the fate of Sarbanes-Oxley in the event of a decision adverse to the PCAOB has been mounting. The reason lies partly in the participation of the Free Enterprise Fund, which has SOX high on its hit list. The Fund has made it clear that it hopes the litigation will trigger a full review of Sarbanes-Oxley. If the entire law were invalidated because of the nonseverability of the PCAOB provisions, the legislation would have to go back to Congress for corrective action, where advocates of change will doubtlessly lobby hard for amendments.

“Legislators who believed in Sarbanes-Oxley in 2001 will likely believe in it in 2008,” Stein notes. “But on the other hand, neither Sarbanes nor Oxley are around to do the pushing, which may put the legislation up for grabs again.”

But Stein–citing the few hours it took Congress to repass the $307 billion Farm Bill earlier this year after a clerical error left out a whole section before it was sent to the White House–is quick to observe that legislators are certainly capable of taking corrective action expeditiously and without fanfare, even with politically sensitive legislation. The Farm Bill is the government’s primary agricultural and food policy tool for matters under the purview of the Department of Agriculture, and Congress passes a new or amended version every several years.

For his part, Morgan–who believes the PCAOB was unnecessary in the first place–says it wouldn’t surprise him if the Board’s defeat in court was the first step in returning the accounting profession to self-regulation.

“I don’t believe the end of the PCAOB would create a real vacuum,” he says. “Rather, the PCAOB suit may give Congress a chance to remedy the weaknesses in the existing system.”