Cases & Deals

Free Enterprise Institute wins challenge of constitutionality of Public Company Accounting Oversight Board

Client(s) Free Enterprise Institute

On June 28, 2010, the United States Supreme Court invalidated a key provision of the Sarbanes-Oxley Act of 2002, ruling in favor of Jones Day clients Free Enterprise Fund and Beckstead and Watts, LLP. In a 5-4 decision, the Court concluded that the Public Company Accounting Oversight Board (PCAOB), an agency created by Sarbanes-Oxley to regulate the accounting industry, violated the Constitution's separation of powers because Congress had given the Board the authority to enforce federal law while, at the same time, immunizing the Board's members from presidential oversight and control. This case has been described as "the most important separation-of-powers case regarding the President's appointment and removal powers to reach the courts in the last 20 years." 537 F.3d 667, 685 (D.C. Cir. 2008) (Kavanugh, J., dissenting).

Free Enterprise Fund is a nonprofit organization advocating limited government, and Beckstead and Watts is an accounting firm subject to the regulatory authority of the Public Company Accounting Oversight Board. In the Sarbanes-Oxley Act, Congress delegated broad governmental authority to the Board but, in order to maintain the Board's independence from political oversight, provided that its members could be removed prior to the expiration of their five-year terms only for cause by the Securities and Exchange Commission, an independent agency whose members are themselves removable by the President only for cause. Adopting Jones Day's argument, the Supreme Court held that this multilevel for-cause protection from removal subverted both the President's ability to ensure that the laws are faithfully executed and the public's ability to pass judgment on his efforts, and was thus incompatible with the Constitution's separation of powers. The Court remedied this constitutional defect by invalidating the statutory provisions limiting the SEC's ability to remove Board members, thereby leaving the Board removable at will by the SEC.

Free Enterprise Fund, et al. v. The Public Company Accounting Oversight Board, No. 08-861 (U.S. Sup. Ct.); 130 S. Ct. 3138 (2010)