On Monday, the U.S. Supreme Court unanimously rejected a challenge that could have changed the face of the Sarbanes-Oxley law. Passed in 2002 as a response to the financial scandals that rocked corporate America (read: Enron and WorldCom), the constitutionality of Sarbanes-Oxley was challenged in the high court.
The court ruled against a challenge to the part of the law that set in motion the Public Company Accounting Oversight Board. The PCAOB works to regulate the accounting industry. The ruling surprised some analysts, who thought the court might overturn the law due to issues with the way the accounting board is appointed.
"Independent regulation of the profession post-Sarbanes Oxley has strengthened audit quality and confidence in financial reporting," said James Turley, global chairman and CEO of Ernst & Young. "We are pleased that the court's decision provides that the PCAOB's independent oversight can continue without interruption."
Changing PCAOB Rules
Instead of throwing out the law, the justices decided that limits on the way members of the oversight board could be removed was unconstitutional. This ruling means the Securities and Exchange Commission, charged with appointing the PCAOB's five members, can now legally remove members for any reason. Previously, board members could only be removed with good cause.
"The Sarbanes-Oxley Act remains 'fully operative as a law' with these tenure restrictions excised," Chief Justice John Roberts wrote in the majority opinion. "Concluding that the removal restrictions are invalid leaves the board removable by the commission at will, and leaves the president separated from board members by only a single level of good-cause tenure. The commission is then fully responsible for the board's actions, which are no less subject than the commission's own functions to presidential oversight."
When President George Bush signed the Sarbanes-Oxley Act into law on July 30, 2002, he called it "the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt." The act mandated a number of reforms that aimed to strengthen corporate responsibility and financial disclosures while combating corporate and accounting fraud .
"The court's ruling is a victory for investors and for the accounting profession. The decision effectively fixes the constitutionality of the PCAOB by making board members subject to 'at will' removal by the SEC and therefore the president," said Barry Melancon, president and CEO of the American Institute of Certified Public Accountants. "As such, the court rejected a transparent attempt to undermine the post-Enron reforms that have served our financial markets well."
Impact on IT
Does the high-court ruling impact IT organizations? The answer is possibly, according to John Berlau, financial policy director at the Competitive Enterprise Institute. There is precedent for rules issued by unconstitutional bodies to be challenged and sometimes invalidated, he explained.
"For some of the rules issued by the PCAOB when it was under this unconstitutional structure (like 404, and also fines and disciplinary actions), there are now some avenues for challenging those, because the PCAOB wasn't accountable to the president," Berlau said. "I expect that this will be a defense to some of the disciplinary actions and some of the rules to be challenged."