The Public Company Accounting Oversight Board along with regulators, audit firms and investor oversight groups are hailing a decision by an appeals court that upheld the constitutionality of the audit firm overseer.Ending a two-year legal battle, the U.S. Court of Appeals for the District of Columbia Circuit held that the manner in which the organization's board members are appointed and overseen under the Sarbanes-Oxley Act is constitutional. The decision was split 2-1 among the judges.
The court found that the law creating the oversight board did not violate the Constitution or encroach upon the separation-of-powers clause.
The Free Enterprise Fund, a free market advocacy group, and a small audit firm in Nevada, Beckstead & Watts - which had been cited by the PCAOB in 2004 for deficiencies in roughly half of the firm's audits that it inspected - filed suit in 2006 against the board, claiming that the way PCAOB members were appointed by the Securities and Exchange Commission violated the Constitution, which gives the president the power to make appointments with the consent of the Senate.
"The court's opinion is consistent with the position taken by the PCAOB, the U.S. government through the Department of Justice and the Securities and Exchange Commission, seven former SEC chairmen, the Council of Institutional Investors, TIAA-CREF, AFL-CIO and several public employee pension funds," the PCAOB said in a statement.
SEC Chairman Christopher Cox called the court's decision "welcome news for the commission, investors and U.S. capital markets."
Peter Iannone, a director and shareholder at CBiz/Mayer Hoffman McCann, said that he didn't believe that the suit was widely supported by other accounting firms. "I didn't see the Big Four jump in behind it," he said. "I don't think it was a largely held opinion in the profession. I've never heard anybody else in the industry speak out against how the PCAOB was formed and structured."
Grant Thornton CEO Ed Nusbaum recently spoke in favor of preserving the PCAOB in an interview. "Personally I think it [would be] a mistake to do away with the PCAOB," he said. "The PCAOB is painful at times. We don't always agree with their comments. They're tough. Sometimes they even bring firms up on charges. I think they'll continue to be aggressive, so it's not like we love them. But, on the other hand, you need some oversight. They seem to be doing a pretty good job at that, and I think it would be a mistake to get rid of them, because then there's no regulator."
Cindy Fornelli, executive director at the Center for Audit Quality, said that she believes the ruling "will benefit the stability of our capital markets. We re-affirm our dedication to audit quality and our strong support of the goals of the Sarbanes-Oxley Act."
