Exploring Corporate Governance Around the World

By Allison Garrett, Senior Vice President for Academic Affairs at Oklahoma Christian University

Monday, June 28, 2010

PCAOB Decision from the Supreme Court

When I left the public company I worked for to go into academia several years ago, some of my friends told me I was escaping SOX. They framed it as a good-natured accusation, but were actually jealous. Earlier today, the US Supreme Court ruled on a controversial portion of SOX in Free Enterprise Fund v. PCAOB.

The PCAOB case deals with the issue of what powers may constitutionally be given to an administrative body like the PCAOB. The PCAOB was created as part of SOX and is similar to self-regulatory organizations like the NYSE, which have rule-making authority and also have power to investigate members and issue sanctions against them. In the case of the PCAOB, the members are audit firms that audit public companies.

The Free Enterprise Fund argued that the PCAOB is unconstitutional because it violates the principle of separation of powers. The Supreme Court found that the layers of organization above members of the PCAOB created a restraint on removal of the Board's members that is unconstitutional. In the case of the PCAOB members, the President is unable to assure tha the Board members effectively carry out their duties. The Presidential power to remove appointed officers for good cause must not be too limited, or the check on agency power is ineffectual.

Other challenges to the PCAOB and SOX were also brought, but the Supreme Court did not find those unconstitutional.

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