Small Public Company Forum

On June 28, 2010, the U.S. Supreme Court issued its ruling in Free Enterprise Fund v. Public Company Accounting Oversight Board (the “PCAOB”).  In the case, Free Enterprise Fund had argued that the establishment of the PCAOB by the U.S. Congress (through the 2002 Sarbanes-Oxley Act) violated the separation of powers provision in the Constitution through the improper delegation of executive responsibilities to officials beyond the control of the President and the executive branch, and that, as a result, the entire Sarbanes-Oxley Act was unconstitutional. Specifically, Title I of the Sarbanes-Oxley Act had permitted members of the PCAOB to be removed by the U.S. Securities and Exchange Commission (the “SEC”) only for cause.

In a 5-4 decision, the Court held that the separation of powers mandate in the Constitution had been violated through the delegation of executive powers beyond the control of the executive branch.  However, the Court rejected the broad constitutionality challenge that had been advanced by Free Enterprise Fund, and instead provided a narrow remedy to specifically address the separation of powers issue.  As a consequence of the ruling, the President or officials appointed by the President (including the SEC) now possess the unfettered power and authority to discharge members of the PCAOB at will.

Chief Justice John G. Roberts, Jr., writing for the majority, stated that “The consequence [of the ruling] is that the [PCAOB] may continue to function as before, but its members may be removed at will by the [SEC]” and that, with the change in the authority to discharge members on the Board, the Sarbanes-Oxley Act remains “fully operative as a law.”

Click here for the AICPA’s positive response to the Court’s ruling. 

It is presently not known whether (and if so, when) the SEC or others in the executive branch would seek to repopulate the PCAOB with their own appointees.  Other effects of the ruling (such as whether the PCAOB will become fully subject to federal budgetary controls, and whether the acts of the PCAOB prior to the ruling will be considered constitutionally fully valid) are also unclear.

Submitted by Abigail Grenfell, President of Internal Control & Anti-Fraud Experts, LLC.