The PCAOB Meets the Constitution: The Supreme Court to Decide on the PCAOB’s Conformity with the Separation of Powers Doctrine and Appointments Clause

Abstract

SYNOPSIS: This commentary provides an overview of the case currently before the U.S. Supreme Court that alleges constitutional problems with the Public Company Accounting Oversight Board (PCAOB). The PCAOB, a Board designed to oversee auditing for publicly traded firms, was created by Congress when it passed the Sarbanes-Oxley Act of 2002 (hereafter, SOX). To enhance PCAOB’s independence from political pressures, Congress established it as a private-sector, non-profit organization, and gave oversight powers to the Securities and Exchange Commission (hereafter, SEC), an independent agency. The plaintiffs in this case allege that Congress empowered the PCAOB with broad executive powers, yet limited the President’s ability to appoint Board members (thus violating the appointments clause of the Constitution) and to control and/or remove Board members (thus violating the separation of powers doctrine of the Constitution). The Supreme Court’s decision about the constitutionality of the PCAOB is important because of its potential impact on (1) the future of auditing oversight; (2) the validity of SOX; and (3) the future of independent agencies in general. From a policy point of view, the case highlights the importance of the combination of independence and accountability for auditing and accounting standard setting and practice.