Supreme Court Strikes Down Portion of Sarbanes-Oxley Act

The U.S. Supreme Court has narrowly decided that the Public Company Accounting Oversight Board (PCAOB), the regulatory body responsible for overseeing auditors of public companies, violates the Constitution’s rules on separation of powers due to the manner in which its members are appointed. Under the arrangement that sparked the lawsuit to begin with, members of the PCAOB are neither appointed nor controlled by the president and cannot be removed by the president at will.

The justices voted 5-4 that the law, enacted in 2002, violated the Constitution's separation of powers mandate. "The court says the president must be able to remove members of the PCAOB, a board created to tighten oversight of internal corporate controls and outside auditors," reported the New York Times.

Chief Justice John Roberts wrote in his opinion that Sarbanes-Oxley will remain in effect, with one change: the Securities and Exchange Commission (SEC), which oversees the PCAOB, will now be able to remove board members at will. Roberts said that one change cures the constitutional problem.

The court, in its majority opinion, authored by Roberts, wrote that this contradicts the parts of Article 2 of the constitution that pertain to executive power, adding that, “without the ability to oversee the Board, or to attribute the Board’s failings to those whom he can oversee, the President is no longer the judge of the board’s conduct. He can neither ensure that the laws are faithfully executed nor can be held responsible for a Board member’s breach of faith.” The opinion said that if this arrangement is allowed to continue, it could lead to an unacceptable expansion of the Legislative Branch’s powers.

The dissenting opinion, written by Justice Stephen Breyer, however, argued that the PCAOB does not significantly interfere with executive power, nor does it violate the separation of powers principle, noting that that the separation of powers principle does not give the president free reign to dismiss any and all Executive Branch officials at will, and that Congress may, at times, set up reasonable limits to presidential authority regarding dismissal of personnel.

Siding with Chief Justice Roberts in the majority were justices Kennedy, Scalia, Thomas and Alito. Joining Justice Breyer in the dissent were justices Stevens, Ginsburg and Sotomayor.

Despite previous speculation otherwise, the Supreme Court said that the part that it found unconstitutional, the relationship between board members and the president, is separable from the existence of the PCAOB in and of itself. This was praised by the Securites and Exchange Commission in a statement released shortly after the court's decision. In the release, SEC Chair Mary Schapiro said that she looks forward to continuing working with the PCAOB in the future. Chief Accountant James Kroeker, meanwhile, reminded people that the PCAOB's auditing standards continue to apply and that audit firms are still required to be registered with the board and remain subject to inspections.