Supreme Court Will Determine Constitutionality of PCAOB

Earlier this year, the Supreme Court agreed to hear oral arguments on the constitutionality of the Public Company Accounting Oversight Board, known as the “PCAOB”, or as many others have amicably dubbed it, “peek-a-boo” (a reference to the acronym, as well as its function to “surprise” inspect audits of accounting firms).  The PCAOB arose out of the Sarbanes Oxley Act (“SOX”), a rather infamous piece of legislation among accountants and CFOs alike. SOX was abruptly enacted in 2002 in response to the widespread accounting frauds occurring at the time.  Incidentally, the Supreme Court has also agreed to hear the appeal of Jeff Skilling, the CEO of Enron, and considered by many as the poster boy of the era.

The plaintiffs in the case are not bringing SOX before the court for the reasons many accountants might think: to challenge Section 404, a short section which places considerable burden on accountants and their clients.  Instead, the plaintiffs, a small accounting firm along with the Free Enterprise Institute, state that the PCAOB created by SOX is unconstitutional based on the separation-of-powers principles.  The issue is whether the Board is consistent with separation-of-powers principles because the SEC oversees the PCAOB, as well as appoints its board members.  The President has no power to intervene in anything the PCAOB does, contrary to the Appointments Clause of the Constitution.

There is an underlying issue in the case though.  According to CFO.com, if the Supreme Court does find the PCAOB unconstitutional, many people are wondering if the courts will revisit the entire SOX Act.  Many free-market economists have blamed the undue burden caused by SOX as the reason why the United States is losing its position as the dominant global capital market.  Particularly, these burdens are the additional fees imposed by the PCAOB as well as its interpretation of internal controls outlined by Section 404 of SOX.

As a former auditor spending summers billing clients to conduct SOX internal control testing, I personally can attest to the cost and amount of burden SOX imposes on public companies.  If the Court decides that the PCAOB is unconstitutional, and the lower courts revisit Sarbanes Oxley, there could be broad implications for the accounting profession and business world in general.  The Court is scheduled to hear arguments on December 7.

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One response to “Supreme Court Will Determine Constitutionality of PCAOB

  1. This information is very valuable and true. it is important to force yourself to make time to blog and I have been receiving media inquiries since I have re-dedicated myself to posting more often.

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