During last month's East Coast heat wave, I found myself watching in air-conditioned comfort the documentary The Smartest Guys in the Room, which chronicled the events leading up to the massive fraud and subsequent collapse of Enron.

It's hard to believe that the now-defunct energy trader, which, at one time, paraded a market cap of nearly $70 billion and a share price of over $100, filed for bankruptcy nearly nine years ago.

But as shameful as that episode was, many have contended (and I as well), that had not an even larger fraud been uncovered at WorldCom roughly one year later, Sarbanes-Oxley and the Public Company Accounting Oversight Board would not be part of the accounting and financial lexicon. But that opens up a far broader discussion. Would the frauds at both companies have reached the mammoth scale they did if SOX been in place, or had the now-shuttered firm Arthur Andersen been required to submit to periodic PCAOB inspections?

In truth, we'll probably never know. But when you hear the audibly cracking voice of a rank-and-file Enron employee explaining that his company 401(k), which was about $400,000 at the Enron's peak, was roughly at $1,000 when the pension accounts were finally released by the Justice Department, it's hard not to wonder, "What if?"

I mention this episode in part because, as most of you know by now, the Supreme Court wisely left the PCAOB and SOX basically intact in a case that, to me, incredibly, had wended its way through a series of appellate rulings before landing on the docket of the high court.

In the five-year-old case, Free Enterprise Fund v. PCAOB, the conservative advocacy group was joined in its lawsuit against the PCAOB by Henderson, Nev.-based accounting firm Beckstead & Watts, which had received a deficient inspection report of its audits by the accounting board. The suit charged that the method of appointing members of the accounting overseer under the Sarbanes-Oxley Act of 2002 was unconstitutional, as the members were appointed by the Securities and Exchange Commission, and not directly by the president. The SEC could only remove the members for cause. The plaintiffs had lost the case in two lower court decisions before it made it to the high court.

In a 5-4 ruling, the high court agreed with the plaintiffs that there were issues with the appointment of commissioners, but merely required that the SEC be able to remove commissioners at will, and declined a broader injunction against the continued operation of the PCAOB or SOX.

Writing for the majority, Chief Justice John Roberts said that the structure of the accounting board violated constitutional separation-of-powers principles because it was too difficult for the president to remove board members. In essence, all that will probably do is truncate the jobs of PCAOB board members, whose tenure might be a tad shorter than they had anticipated.

In his dissent, Supreme Court Justice Stephen Breyer wrote that it could potentially impact the job security of federal officials at other agencies as well.

The Supremes' ruling itself basically addresses the challenge without requiring that Congress change or tailor SOX, which could have triggered scores of unintended consequences.

There are those who obviously hoped for a somewhat broader ruling - i.e., striking down Sarbanes-Oxley and the board entirely - but the high court showed that for the good of the profession and investors, they were, for the moment, the smartest guys in the room.


Bill Carlino


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