Observers of Monday's Supreme Court hearing on the constitutionality of the Public Company Accounting Oversight Board's structure have been hedging their bets on which way the justices will lean. It's anyone's guess as the consensus is there will be a split decision.
Some are hoping the case will enable Congress to bring a hatchet to the Sarbanes-Oxley Act. Others expect it will mean only a minor technical change. At the very least, the case should spur discussion about how much the quasi-government agency knows about your accounting firm and how much the law allows it to hide.
The question before the Court is whether Sarbox violates the Constitution because it gives the president no say in the appointment of the five-member board. Based on the discussion between the justices and lawyers, the issue could center on how much the Court buys in to the amount of control the Securities and Exchange Commission has over the PCAOB and how much autonomy the board has in setting standards, inspecting firms, and charging public companies an annual fee for its existence.
The lawyer for the plaintiffs claimed the PCAOB "is not under the wing of the SEC now." Still, the SEC does have budget approval of the board, appoints its members, and has final say on all its rules and disciplinary actions. Justice Ruth Bader Ginsburg noted that "it can't do anything that doesn't have the SEC's approval." However, former SEC commissioner Paul Atkins has recently disputed that notion.
The case has given hopes to Sarbox critics who wish the law would go away as the separation-of-powers question highlights the haste with which the law was passed following Enron's undoing. If the Court does go against the PCAOB and there's any reworking of the board's makeup, serious discussions should focus on the board's transparency. As the CorporateCounsel.net Blog notes, a public company isn't aware when the PCAOB -- a nongovernmental entity but a regulator nonetheless -- is going through its work papers. In addition, little is told to the public about PCAOB inspections.
To be sure, Sarbox explicitly handcuffs the board's ability to share data. For instance, any defects the PCAOB finds in a firm's quality-control systems are kept private as long as the firm fixes the problems within a year after an inspection report is issued.
Moreover, the lack of transparency has apparently caused the PCAOB delays in taking disciplinary actions against firms. Indeed, we are all in the dark when it comes to audit firms that may be in serious hot water with the PCAOB, which has issued 25 enforcement actions since it was created in 2003. "As required by the Sarbanes-Oxley Act, the Board's contested enforcement matters are non-public until there is a final resolution," said PCAOB chairman Daniel Goelzer. "As a result, respondents sometimes perceive that litigation -- and delay in public disclosure -- is in their interest for reasons not always related to the merits of the case." |
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