The U.S. Supreme Court on Monday ruled that Congress violated the Constitution when it set up the Public Company Accounting Oversight Board after the Enron and WorldCom collapses, saying the panel was too insulated from presidential control.
The 5-4 decision stopped short of ordering the work of the auditing board to stop, instead saying the SEC — which is appointed by the president — must have unfettered power to fire the board’s members.
The PCAOB was established by the 2002 Sarbanes-Oxley law.
Writing for the majority, Chief Justice John Roberts said the board, as originally set up, was too unaccountable. The SEC appoints board members and, under Sarbanes-Oxley, could remove them only “for cause.” The SEC is an independent agency whose members by tradition the president can remove only in limited circumstances.
“No one doubts Congress’ power to create a vast and varied federal bureaucracy,” Mr. Roberts wrote. “But where, in all this, is the role for oversight by an elected president?”
The decision divided the court along ideological lines. Justices Antonin Scalia, Clarence Thomas, Samuel Alito and Anthony Kennedy joined Mr. Roberts’ majority opinion.
The PCAOB, which replaced a system of self-regulation by the auditing profession, is a private organization that performs government-type functions.
The Obama administration defended the PCAOB, saying the SEC exercised comprehensive control over the board’s activities, including the auditing standards it issues and the enforcement actions it takes. U.S. Solicitor General Elena Kagan, now a Supreme Court nominee, argued the case for the government.
The PCAOB has issued a series of auditing standards and taken 25 enforcement actions.
The Supreme Court said in 1935 that independent agencies are constitutional even if the president has only limited power to fire their leaders. That ruling spawned what has become known as the fourth branch of government.
A Nevada accounting firm and Free Enterprise Fund, a small-government advocacy group, said the PCAOB goes beyond other independent agencies through the combination of its power and its lack of political accountability.
In a statement, the PCAOB said all its programs “will continue to operate as usual, including registration, inspection, enforcement and standard-setting activities.”
“I am pleased that the court has determined that the board’s operations may continue and the Sarbanes-Oxley Act, with the board’s tenure restrictions excised, remains fully intact,” added SEC Chairman Mary Schapiro in a separate statement.
The Council of Institutional Investors in a statement said it is pleased the PCAOB “may continue to operate as before, with only a minor change to its existing structure.”
“While the Supreme Court modified how PCAOB members may be removed, it did not question the importance of the PCAOB’s mandate under the Sarbanes-Oxley Act to regulate the auditors of public companies or the validity of any other aspect of that landmark corporate reform law,” the CII statement said.