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Supreme Court Srikes Down Part of Sarbanes-Oxley Act

Source: WSJ

Posted on 28 Jun 2010

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A divided Supreme Court on Monday struck down some federal provisions that created a private regulatory body to inspect and discipline public-company accountants.

The high court, in a 5-4 opinion by Chief Justice John Roberts, found fault with some parts of the Public Company Accounting Oversight Board, which was created as part of the 2002 Sarbanes-Oxley Act to combat corporate accounting scandals in the wake of collapses at Enron and WorldCom.

Congress had given the five-member board, a not-for-profit corporation, broad regulatory authority over accounting firms that audit publicly traded companies.

Justice Roberts said the structure of the accounting board violated constitutional separation-of-powers principles because it was too difficult for the president to remove board members.

"The president cannot take care that the laws be faithfully executed if he cannot oversee the faithfulness of the officers who execute them," Justice Roberts wrote.

The court, however, refused to strike down the accounting board in its entirety, saying the board's mere existence did not violate the Constitution.

Justice Roberts said Sarbanes-Oxley "remains fully operative as a law." He said the unconstitutional provisions governing the board could be severed from the rest of the law.

Justice Roberts said the Securities and Exchange Commission will now have the authority to remove board members at will. Previously, the SEC could only remove members for good cause.

The court's ruling fell along the court's ideological fault lines, with the conservatives in the majority and the liberal justices in dissent.

Justice Stephen Breyer, writing for the dissenters, said the accounting board raised no constitutional concerns. "The court's contrary holding threatens to disrupt severely the fair and efficient administration of the laws," Justice Breyer wrote.

A free-enterprise group and a Nevada accounting firm had challenged the legality of the board, arguing that it violated constitutional separation-of-powers principles.

The challengers argued that Congress impermissibly vested the accounting board with widespread and unsupervised government power that could not be checked by the president or the head of a government department.