Free Enterprise Fund and Beckstead and Watts v. Public Company Accounting Oversight Board

The Supreme Court agreed to hear a constitutional challenge to a 2002 law that created a national board to oversee public company auditors.

Following the high-profile Enron and Worldcom accounting scandals, Congress passed the Sarbanes-Oxley Act, which created the Public Company Accounting Oversight Board to regulate auditors of public companies.

The anti-tax group Free Enterprise Fund and Beckstead & Watts LLP, a small Nevada accounting firm, filed a lawsuit in 2006, asserting that the Act violated the separation-of-powers doctrine by the mode of selection and removal of members of the oversight board.

A federal judge on the U.S. District Court for the District of Columbia granted summary judgment in favor of the oversight board.

In August 2008, a divided three-judge panel on the U.S. Court of Appeals for the D.C. Circuit affirmed, ruling that past Supreme Court decisions on the president’s relationship with administrative agencies meant the board’s set-up must be upheld.

On Nov. 17, 2008, the full circuit, voting 5-4, denied rehearing en banc.

“At every level, it is clear that this Court’s review is warranted,” FEF and Beckstead argued in urging the Supreme Court to accept the case. “The issues presented go to the heart of the relationship between the Legislative and Executive Branches and all agree that this is a ‘case of first impression’ because it involves a wholly unprecedented model for federal agencies.”

On May 18, the Supreme Court accepted the case for review. Justices will hear oral arguments during the fall term, which begins Oct. 5.

Question presented: Whether the Sarbanes-Oxley Act is consistent with separation-of-powers principles - as the Public Company Accounting Oversight Board is overseen by the Securities and Exchange Commission, which is in turn overseen by the President - or contrary to the Appointments Clause of the Constitution, as the PCAOB members are appointed by the SEC.