The Supreme Court’s 5–4 decision Monday in the constitutional challenge to the PCAOB will leave the agency virtually unchanged. The court’s ruling will not affect day-to-day operations of the PCAOB, the agency said.
Chief Justice John Roberts wrote the majority opinion. In it, he said the court was isolating, or “severing,” from the rest of the Sarbanes-Oxley Act the one constitutional flaw the court found regarding the power to remove PCAOB members. “The consequence is that the [PCAOB] may continue to function as before, but its members may be removed at will by the [SEC],” said the Court’s summary of the decision.
The court also emphasized that all other provisions of the SOX will remain in effect. “The Sarbanes-Oxley Act remains ‘fully operative as a law’ with these tenure restrictions excised,” the court said.
“The decision effectively fixes the constitutionality of the PCAOB by making board members subject to ‘at will’ removal by the SEC and therefore the president,” said AICPA President and CEO Barry Melancon. “It sustains the continued function of both the PCAOB and Sarbanes-Oxley.”
“We are pleased that the decision allows the PCAOB to continue without interruption to carry out its important mission of overseeing public company audits in order to protect investors and promote the public interest,” PCAOB Acting Chairman Daniel L. Goelzer said in a news release.
“The consequence of the Court’s decision is that PCAOB board members will be removable by the SEC at will, rather than only for good cause. All other aspects of the SEC’s oversight, the structure of the PCAOB and its programs are otherwise unaffected by the Court’s decision,” the PCAOB release said. “Accordingly, all PCAOB programs will continue to operate as usual, including registration, inspection, enforcement, and standard-setting activities.”
“It is important to understand that the PCAOB’s auditing standards, as approved by the [SEC], continue to apply,” said James L. Kroeker, the SEC’s chief accountant, in a press release. “Audit firms are required to be registered with the PCAOB, and they remain subject to inspections.”
The case focused on two intertwined legal issues. The first issue raised by the plaintiffs was whether the PCAOB violates the appointments clause of the Constitution. The second issue was the separation of powers doctrine, which requires the president to execute laws made by Congress. The power to appoint officers of the government is one indicator of presidential authority. The power to remove officers of the government is another. Under the Sarbanes-Oxley Act, only the SEC can remove members of the PCAOB and then only under limited circumstances.
But the PCAOB and Solicitor General and Supreme Court nominee Elena Kagan, who argued in support of the PCAOB before the Supreme Court, emphasized that the president appoints and can remove, at least for cause, SEC commissioners.
—Matthew G. Lamoreaux ( firstname.lastname@example.org ) is a JofA senior editor.
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