Risk Management

Judge Throws Out Suit Challenging PCAOB

By questioning the legality of the oversight board, the plaintiffs had sought to dismantle the entire Sarbanes-Oxley Act.
Stephen TaubMarch 22, 2007

In a major blow to the burgeoning efforts to chip away at the Sarbanes-Oxley Act, a U.S. District Court judge on Wednesday dismissed a lawsuit challenging the constitutionality of Sarbox’s creation of a separate body to oversee the accounting industry, according to press reports.

Judge James Robertson of the District of Columbia dismissed the case and granted summary judgment in favor of the Public Company Accounting Oversight Board in a 14-page opinion, according to the wire service.

The plaintiffs in the case had seen the attack on the PCAOB as a wedge to undo the entire act. While many federal laws have “severability” provisions that enable Congress to change part of a law without dismantling it entirely, Sarbanes-Oxley doesn’t, Michael Carvin, a lawyer with Jones Day in Washington and lead attorney for the plaintiffs, told CFO.com last year after the case was filed. A successful lawsuit might prompt a “remedy broader than fixing the board,” he added, and maybe “force Congress to face the issue” of passing legislation to overhaul Sarbox as a whole. The plantiffs’ legal team also included Kenneth Starr, the well-known prosecutor of then-President Bill Clinton.

But the attempt to challenge the creation of the PCAOB as a violation of separation-of-powers principle and Appointments Clause of the Constitution went down in flames. “We are pleased with the court’s decision and look forward to continuing to fulfill the mandate given us by Congress to protect the interests of investors,” according to a statement by the oversight board cited by Dow Jones.

The suit was brought by Beckstead & Watts LLP, a small Nevada accounting firm, and a number of groups, including the Free Enterprise Fund, which has aggressively lobbied against Sarbox.

The Free Enterprise Fund plans to appeal the ruling, according to Dow Jones. “We knew all along this was going to be a long process,” Jim Terry, the FEF’s executive director told AP.

In his opinion in favor of the board, however, Judge Robertson wrote that “the plaintiffs have brought a facial challenge to the PCAOB, presenting nothing but an hypothetical scenario of an overzealous or rogue PCAOB investigator,” according to BusinessWeek.com.