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United States: Accounting Oversight Board Ruled Constitutional

(Sept. 10, 2008) On August 22, 2008, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the Public Company Accounting Oversight Board (PCAOB), which is appointed and controlled by the Securities and Exchange Commission (SEC), does not violate the U.S. Constitution.

The Sarbanes-Oxley Act of 2002 established the PCAOB to regulate the accounting of companies subject to the securities laws. It vested the authority to appoint and control the PCAOB with the SEC. A non-profit organization and an accounting firm brought suit arguing that the creation of the PCAOB was unconstitutional. The plaintiffs argued that the PCAOB violated the Appointments Clause, which provides that while officers of the United States shall be appointed by the President with the advice and consent of the Senate, inferior officers may be appointed by the heads of departments. They also argued that the Board's creation violated the constitutional principle of separation of powers. The district court granted summary judgment to the Government, and an appeal was taken.

The D.C. Circuit ruled that the PCAOB does not violate the Appointments Clause because, given the substantial control by the SEC over the Board, its members are officers that are inferior to the SEC for purposes of that clause. The court ruled that the separation of powers principle is not violated because independent agencies like the SEC are permitted under the Supreme Court's constitutional precedents to exercise broad authority over subordinate entities like the PCAOB. One member of the three-judge panel dissented. (Free Enterprise Fund v. Public Company Accounting Oversight Board, No. 07-5127 (D.C. Cir. Aug. 22, 2008), available at http://pacer.cadc.uscourts.gov/common/opinions/200808/07-5127-1134687.pdf).