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District Court: PCAOB Is Constitutional

A federal district judge has ruled that the Public Company Accounting Oversight Board is constitutional, rejecting the claim that the appointment of PCAOB members violated the appointments clause of the Constitution. This provision authorizes the president to appoint "officers" of the United States, while allowing Congress to delegate the appointment of inferior officers to "heads of departments."

An audit firm argued that PCAOB members are not inferior officers because they are neither appointed nor supervised on a daily basis by principal officers directly accountable to the president. The court said, however, that PCAOB members are inferior officers since they have no power to render a final decision on behalf of the United States and are subject to oversight and removal by the SEC. The court also rejected the argument that PCAOB members should have been appointed by the SEC chairman rather than by the entire Commission. The audit firm lacked standing to bring this assertion, reasoned the court, because the SEC chair has voted for every member of the board and the firm did not allege that its injuries were in any way attributable to the current PCAOB membership.

Finally, the court said that Congress constitutionally delegated legislative power to the PCAOB because the legislative delegation effected by Sarbanes-Oxley is squarely within the bounds of modern non-delegation doctrine. The court noted that the board applies intelligible standards of auditing, quality control and ethics that are either required by the Sarbanes-Oxley Act or SEC rules or are in the public interest for investor protection.

The SEC had defended the PCAOB against the constitutional attack on the appointment process of board members and the manner in which the board conducts its operations. In a joint brief with the Justice Department, the SEC contended that the method detailed in the Sarbanes-Oxley Act for appointing board members satisfied the appointments clause requirements. In addition, the brief said that the pervasive authority of the SEC to supervise and control the PCAOB's activities refutes the depiction of the board as a "rogue agency" violating the notion of the separation of powers. Also, the Commission said that the board's performance of diverse functions pursuant to a variety of intelligible principles countered the argument that the Sarbanes-Oxley unconstitutionally delegated legislative power to the board.

Seven former SEC chairmen, including William Donaldson, Arthur Levitt, Harvey Pitt, David Ruder and Roderick Hills, had filed an amicus brief defending the PCAOB as constitutional. The former chairmen described the PCAOB as being squarely within the historical structure of federal regulation of the capital markets, which has relied for decades on a unique combination of public-private institutional relationships under SEC oversight. The board exists, maintained the former SEC heads, because of a congressional conclusion that the system of profession-dependent self-regulation of auditing contributed to the financial scandals of the recent past. Nothing in the federal constitution denied Congress the power to make the policy judgments reflected in the legislative design of the PCAOB-SEC relationship, according to the brief.

Free Enterprise Fund v. Public Company Accounting Oversight Board (DC DofC) will be published in a forthcoming Report.