Supreme Court Issues Decision in the Constitutional Lawsuit Challenging the PCAOB

On June 28, 2010, the U.S. Supreme Court ruled with a 5-4 decision on the case of Free Enterprise Fund vs. Public Company Accounting Oversight Board (“PCAOB” or the “Board”).

In December 2009, the non-profit Free Enterprise Fund sued the PCAOB claiming that the Board is unconstitutional. In addition, the suit sought an injunction removing all of the Board’s powers. The Sarbanes-Oxley Act of 2002 (“SOX”) was written to allow the SEC to only be able to remove a Board member for “good cause” shown in accordance with certain procedures In order to keep the PCAOB independent. It was created so the President could not appoint or terminate any PCAOB officials. Their main argument was that due to the Board’s influential power, the Board members should be appointed by the President with the consent of the U.S. Senate as required under Article II of the Constitution. The Supreme Court ruled that the removal of the Board members for only “cause” is unconstitutional due in part to the lack of presidential control. The Supreme Court removed this provision from the act, thereby allowing the SEC to remove board members at “will” which is within the constitutional requirements. The Supreme Court also declined the broad injunction against the Board and accordingly, all PCAOB activities (i.e. registration, inspection, enforcement, standard setting, etc.) will continue to operate as usual. “The court’s ruling is a victory for investors and for the accounting profession”, said the AICPA President and CEO Barry Melancon. The bottom line is that this decision reaffirms the constitutionality of the PCAOB and continues the function of the PCAOB and SOX.