Sarbanes-Oxley is Here to Stay

The U.S. Supreme Court ruled today that a small portion of the Sarbanes-Oxley Act of 2002 is unconstitutional. According to the ruling, The Public Company Accounting Oversight Board ("PCAOB") which oversees the accounting firms who audit U.S. public companies currently violates constitutional separations-of-powers principles.

The Court viewed the manner in which PCAOB members are currently appointed and removed to be unconstitutional because it did not operate at the behest of the President of the United States. As such, the U.S. Securities and Exchange Commission will now have the authority subject to the President's review to appoint and remove PCAOB members at will.

However, the PCAOB itself and the remainder of the Sarbanes-Oxley Act remains intact and constitutional. So, those hoping to see the full demise of the Sarbanes-Oxley Act will certainly be disappointed by today's decision. To read the full ruling, click here.

SOX Sour Grapes

This week, the U.S. Supreme Court agreed to hear a case regarding the constitutionality of the Public Company Accounting Oversight Board ("PCAOB") formed as a result of the Sarbanes-Oxley Act of 2002 ("SOX").  The crux of the case is the question of who should appoint the PCAOB directors.  As it stands today, the directors are appointed by the U.S. Securities & Exchange Commission ("SEC").  The case argues that the board members should be appointed by the U.S. President or an appointee of the President.  However, the real aim of the case is to render the entire SOX act unconstitutional due to the lack of a severability clause in the legislation.  Here is some background on the case as reported by CFO magazine.

The question over the PCAOB's constitutionality began three years ago, when the Free Enterprise Fund, a policy group interested in promoting small government, took on the case of a small accounting firm criticized by the board after one of its inspections. The group contends that because the regulator was not a legal body under the constitution, it had no standing to perform such inspections or make such criticisms.

According to the noted origins, it looks like a case of sour grapes on the part of an accounting firm that has gained a foothold with those looking to overturn SOX.  We are in a much different environment than we were three years ago when the case was filed.  As a result, the Supreme Court decision should be very interesting. Stay tuned.