Washington, D.C. - In a case that carries the potential to reshape the regulatory landscape of the accounting profession, the U.S. Supreme Court last month heard oral arguments in a lawsuit challenging the constitutionality of the Public Company Accounting Oversight Board - with several justices appearing to take the plaintiffs' side in the case.

The case, Free Enterprise Fund v. Public Company Accounting Oversight Board, was brought on behalf of a small Nevada accounting firm, Beckstead & Watts, which challenged the constitutionality of the law after objecting to the PCAOB's inspection findings on a number of its audit reports.

The Free Enterprise Fund, a conservative group opposed to government regulation, had lost the case before both a district judge and an appeals court. But if it wins before the Supreme Court, the ruling could have wide-ranging implications not only for the PCAOB and its oversight of public accounting firms, but also for the law that established the board: the Sarbanes-Oxley Act of 2002.

The plaintiffs argued that the PCAOB violates the separation-of-powers principles in the Constitution because the PCAOB's members are appointed by the Securities and Exchange Commission, and not directly by the president, and they cannot be fired except for cause. Several justices indicated some sympathy for that viewpoint in their questions.

The court is expected to render its decision by mid-2010.

"As a practical matter, does the president have any ability to control what the board does?" asked Justice Samuel Alito.

Justice Antonin Scalia also remarked on the limitation on the powers of the president with respect to the SEC and the PCAOB. "He cannot remove the commissioners, and it's the commissioners that govern the board, not the chairman," he said.

Chief Justice John Roberts wondered if Sarbanes-Oxley went too far in establishing the independence of the PCAOB, "because you've got to rely on the SEC to get to the board." He appeared to question how much authority the SEC actually has over the board.

"The board can act, and the SEC can, I suppose, retroactively veto their actions," he said. "But the SEC doesn't propose what actions the board takes, actions that can have significant, devastating consequences for the regulated bodies."

However, Justice Ruth Bader Ginsburg seemed sympathetic to the PCAOB's case, noting, "The SEC is set up like the [Federal Communications Commission], the other independent regulatory commissions, but this is a board that has a relationship with the SEC, where it can't do anything that doesn't have the SEC's approval."

Justice Sonia Sotomayor also seemed skeptical of the Free Enterprise Fund attorney's arguments. "Let's break down each part of your argument, please," she said. "You are suggesting that Congress doesn't have the power to determine that a particular principal or agent of the government doesn't have certain responsibilities?"

The swing vote may be Justice Anthony Kennedy. His former clerk, Brett Kavanaugh, is now a judge on the appeals court that heard the case last year and ruled in favor of the oversight board. However, Kavanaugh sided with the Free Enterprise Fund in a dissenting opinion.

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