Supreme Court Strikes Down Sarbanes-Oxley Accounting Board

The Supreme Court Monday struck down part of a 2002 law that created a national board that polices auditors of public companies, ruling that it violated the constitutional requirement on the separation of powers among the branches of government.

The high court's ruling on the Public Company Accounting Oversight Board (PCAOB) could put pressure on Congress to revisit the Sarbanes-Oxley corporate reform law, opening it up for potential changes in the reporting duties of companies.

The court's mixed ruling held that the board violated the the U.S. Constitution's separation of powers principle, but also held that the law does not violate the Constitution's appointments clause.

At stake in the case was how corporate America is audited and a key provision of the Sarbanes-Oxley corporate reform law adopted in response to the Enron and WorldCom accounting scandals early in the decade.

The ruling was a victory for the Free Enterprise Fund and a small Nevada accounting firm, which argued that the law unconstitutionally stripped the president of power to appoint or remove board members or to supervise their activities.

Board members are appointed by the U.S. Securities and Exchange Commission and can only be removed by the SEC for cause. The board, set up as a quasi-private agency, has the power to impose rules and to inspect and fine accounting firms.

The board is funded through fees it collects from public companies. It inspects thousands of auditors, including the Big Four accounting firms: Ernst & Young LLP, KPMG , PricewaterhouseCoopers and Deloitte & Touche LLP.

The Free Enterprise Fund and the accounting firm sued in 2006. A federal judge and a U.S. appeals court rejected the challenge.

The Supreme Court's majority opinion said the limits on the removal of board members violated the separation of powers requirement.

But the court also held that the unconstitutional provisions can be separated from the rest of the law.