The accounting scandals of the early part of this decade, including the debacle at Enron, gave rise to the Public Company Accounting Oversight Board (PCAOB). Created under the Sarbanes-Oxley legislation, the board watches the accounting firms that certify the books of public companies.
A small firm under investigation by the PCAOB challenged the constitutionality of the board; its case was argued Monday at the Supreme Court. While the legal provision that created the PCAOB is flawed, the justices can address the problem without invalidating the board as a whole. The accounting firm argues that Congress unconstitutionally infringed on the president's duty to govern the executive branch by stripping him of power to appoint and remove members of the board; under the law, the Securities and Exchange Commission, in consultation with the Treasury Department and the Federal Reserve, is responsible for naming the five-person board.
The often intense debate surrounding enactment of Sarbanes-Oxley and the accounting oversight board shows that lawmakers were concerned about the catastrophic failures of the accounting industry to police itself. Congress clearly wasn't interested in isolating the president from oversight; it was intent on creating a strong and independent regulator.
The United States has long relied on a combination of independent agencies, such as the SEC, and outside "self-regulatory organizations," such as the New York Stock Exchange, to oversee the financial system. The PCAOB was crafted in this mold. The outside watchdogs passed constitutional muster even though the president has no direct appointment role because the SEC -- whose members are presidentially appointed -- ultimately calls the shots on policy and rules. The SEC has even more authority over the PCAOB.
Yet Congress went too far in an effort to insulate the board from industry and political pressure. To oust a wayward member, the SEC must conclude that the member "willfully violated" the rules of the board or securities laws and "willfully violated his authority." Compare that with the SEC's ability to remove officers of similar bodies simply "for cause." If the justices strike down the PCAOB standard, the common law would then entitle the SEC to remove members "at will." Taking such a step should cure the possible constitutional infirmity and would otherwise leave intact an important, congressionally created policy tool that has served a crucial role in increasing confidence in the legitimacy of public company audits.
