Sarbanes-Oxley and the PCAOB Decision

Sarbanes-Oxley and the PCAOB Decision

Sarbanes-Oxley and the PCAOB Decision

On June 28th, the US Supreme Court voted on a decision in the Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board and United States of America case. The vote rejected a challenge to the constitutionality of the Sarbanes-Oxley Act. The PCAOB was created under Sarbanes-Oxley in 2002, to oversee the auditors of public companies. The goals of the PCAOB are toprotect investors and public interest through the promotion of informative, fair and independent audit reports.

In the New York Times article "Justices Uphold Sarbanes-Oxley Act," Floyd Norris writes:

"The court turned aside a broad challenge to one part of the law, which established the Public Company Accounting Oversight Board (PCAOB) to regulate the accounting industry. Some commentators had forecast that the court might throw out the entire law because of problems with the way the accounting board is appointed, but the justices refused to do so. Instead, in a 5-to-4 split, the court found that the way members of the oversight board could be removed was unconstitutional."

This case raises awareness of the issues surrounding separation-of-powers and accountability.As it currently stands, Sarbanes-Oxley continues to live on as a law. However, changes have been made to the removal process for members of the PCAOB.Prior tothe decision from the Supreme Court, the Securities and Exchange Commission (SEC) had the ability to appoint 5 people to the PCAOB, and their removal could only be warranted if there was a good enough reason to do so. Now, the SEC can remove members as they please.

Yesterday's decision allowed those within the accounting industry to breathe a sigh of relief, as accounting rulesare important and help foster trust with investors. A lack of accounting rules (among other things)in the pre-Enron and WorldCom days lead to the need for standardized accounting rules.Therefore, if Sarbanes-Oxley was to be eliminated in its entirety, what would the future look like for businesses and investors?

The Wall Street Journal article, "3rd Update: US Supreme Court Invalidates Part Of Accounting Board," written by Brent Kendall and Fawn Johnson, provides an overview of the reactions to the Supreme Court's decision, as well as the separation-of-power issue:

"Roberts said the structure of the accounting board violated constitutional separation-of-powers principles because it was too difficult for the president to remove board members. The president cannot take care that the laws be faithfully executed if he cannot oversee the faithfulness of the officers who execute them,' Roberts wrote. The court, however, refused to strike down the accounting board in its entirety, saying the board's mere existence didn't violate the Constitution. PCAOB said it will continue to run all programs as usual, and no legislation will be needed to bring it in line with the Constitution. We are pleased that the decision allows the PCAOB to continue without interruption to carry out its important mission of overseeing public company audits,' said PCAOB Acting Chairman Daniel L. Goelzer."

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