But the Public Company Accounting Oversight Board still faces a major problem of dealing with a number of foreign countries that refuse to cooperate with it. And it is soon likely to get a majority of new members, perhaps including — for the first time — an auditor who has experience being regulated by the board.
In its ruling, the Supreme Court unanimously rejected a challenge to the constitutionality of the Sarbanes-Oxley Act of 2002, which established the board and sought to reform corporate America after the Enron and WorldCom accounting scandals.
A small accounting firm and a group called the Free Enterprise Fund had asked the court to rule the Public Company Accounting Oversight Board was illegal because it was appointed by the Securities and Exchange Commission, rather than the president.
Because the Sarbanes-Oxley Act contained no severability clause, some legal commentators forecast that such a ruling would lead to the entire act being thrown out, forcing Congress to act again or return to the law as it was before the act was passed.
Instead, the justices unanimously ruled that the board has been legally established and appointed. There was a 5-to-4 split, but it concerned only the way members of the board can be removed from office.
As a result of that decision, the S.E.C. will now be able to remove members at will, rather than being able to do so only if there were good cause to do so. There is no indication that the S.E.C. has any desire to fire any board members, so as a practical matter that ruling is unlikely to have any effect, unless it perhaps makes potential board members less likely to accept the job.
“The Sarbanes-Oxley Act remains ‘fully operative as a law’ with these tenure restrictions excised,” wrote Chief Justice John G. Roberts Jr. in the majority opinion.
While the decision’s immediate effect may be limited, it touched off a furious debate among the justices about the limits of executive power. Justice Stephen G. Breyer read his dissent from the bench and warned that the majority had imperiled the positions of hundreds and perhaps thousands of government officials.
Proponents of the “unitary executive” theory have long maintained that Congress should not have the power to protect agencies responsible for executing the law from presidential control. In the case of the accounting board, the S.E.C., but not the president, could remove members of the board, and only for cause. One level up, the president can remove S.E.C. commissioners, but again only for cause.
Chief Justice Roberts, writing for himself and Justice Antonin Scalia, Anthony M. Kennedy, Clarence Thomas and Samuel A. Alito Jr., said that double-insulation violated the principles of separation of powers.
“The buck stops with the president, in Harry Truman’s famous phrase,” Chief Justice Roberts wrote.
“The Constitution that makes the president accountable to the people for executing the laws also gives him the power to do so,” the chief justice continued. “That power includes, as a general matter, the authority to remove those who assist him in carrying out his duties. Without such power, the president could not be held fully accountable for discharging his own responsibilities; the buck would stop somewhere else.”
In his written dissent, joined by Justice John Paul Stevens, Ruth Bader Ginsburg and Sonia Sotomayor, Justice Breyer said that supervision of the accounting board “violates no separation-of-powers principle.” But it does, he said, call into question the constitutional status of many government officials.
“Reading the criteria as stringently as possible,” he wrote, “I still see no way to avoid sweeping hundreds, perhaps thousands of high level government officials within the scope of the court’s holding, putting their job security and their administrative actions and decisions constitutionally at risk.”
At least potentially among them, he said, were the leadership of the Nuclear Regulatory Commission, the Social Security Administration, administrative law judges and military officers.
The decision in the case, Free Enterprise Fund v. Public Company Accounting Oversight Board, No. 08-861, was a defeat for Solicitor General Elena Kagan, who argued it in December and whose confirmation hearings for a seat on the Supreme Court began on Monday.
With the issue settled, the S.E.C., under the direction of its chairwoman, Mary L. Schapiro, is expected to promptly act to fill three of the five seats on the accounting board. Under the law, board members are appointed to five-year terms and can serve up to two terms. But two of the four current members, Charles D. Niemeier and Bill Gradison, have completed their second terms and stay on only because no successors have been selected.
The commission delayed action because it was doubtful many good candidates would want the jobs before the high court issued its decision.
When Congress established the board, it specified that only two of the five members could be certified public accountants — and both those jobs went to former S.E.C. officials — Daniel L. Goelzer and Mr. Niemeier.
Mr. Goelzer’s second term will not end until 2012, and he is acting chairman. But Mr. Niemeier is likely to be replaced soon, and the top accounting firms have been lobbying the commission to have one of their partners, or former partners, named to the job. The S.E.C. is likely to designate one of the new appointees as chairman.
In a statement, Mr. Goelzer said the board was pleased it would be able to “carry out its important mission of overseeing public company audits in order to protect investors and promote the public interest.”
Despite the fact the board was established by Congress, it is not formally a government agency and does not have to comply with federal pay schedules. Members are paid more than $500,000 a year.
The law requires that any auditor who is involved in an audit of a company that sells securities on the public market in this country be registered. That includes many foreign firms, which may be involved in auditing foreign branches of American firms or may audit foreign firms that choose to list securities in the United States.
But the United States has been unable to persuade several important jurisdictions — the European Union, Switzerland and China — to allow inspections of auditing firms based there. The board had been able to do joint inspections in some members of the European Union, but it banned that in 2009 because of issues about sharing information. Congress may need to change the law to allow the board to share documents with equivalent foreign boards.
A major issue for the new members of the board will be working, with the administration and perhaps Congress as well as the S.E.C., to find a way around that issue.
When the Sarbanes-Oxley law took effect, there was a lot of complaining about the expense of a requirement that companies assess their management controls and that auditors offer an opinion on those controls. But the board worked to reduce the cost of those audits, and a survey of 400 corporate executives earlier this year by Protiviti, a consulting and internal auditing firm, found that 70 percent of the executives thought the benefits of complying were greater than the costs.
The financial regulation bill approved by a House-Senate conference committee last week would expand the authority of the board to inspect accounting firms to include firms that audit registered broker dealers, even if the firm has no public clients.
Until the Sarbanes-Oxley law was enacted, there had been little national regulation of accountants. Accounting firms had bitterly opposed efforts by the S.E.C. to approve regulations on auditor independence from clients. The S.E.C. could bar an auditor or a firm from certifying audits of public companies — effectively a death penalty — but doing that to a major firm seemed highly unlikely.
The board’s inspections and regulations have generally won praise however, and major accounting firms said before the court ruling that they hoped the board would survive, as it did.