The fate of Sarbanes-Oxley to be determined by the U.S. Supreme Court

Today the U.S. Supreme Court will hear the case of Free Enterprise Fund vs. Public Company Accounting Oversight Board (PCAOB) to determine the constitutionality of PCAOB, the organization created under the Sarbanes-Oxley Act to oversee public accounting firms and crack down on fraudulent accounting.

The constitutional issue in question is whether the PCAOB violates the Constitution’s separation of powers and the Appointment Clause, which states that only the President of the United States has the power to appoint and oversee an executive level body. The five member Board, however, is appointed by the SEC and is given the broad authority to create whatever rules that “may be necessary or appropriate in the public interest of for the protection of investors.”

Implications:

If the Court rules against PCAOB, Congress can possibly modify Sarbanes-Oxley in compliance with the Constitution, or it needs to throw it out entirely. The latter scenario may require companies to adapt to an entirely new set of accounting rules.

If the Court upholds PCAOB, then it could set a precedent for Congress to create similarly powerful regulative bodies.

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