Sarbanes-Oxley Act survives test

July 2, 2010
| By Pete Daly |
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The U.S. Supreme Court ruled last week that one part of the 2002 Sarbanes-Oxley Act is indeed un-constitutional, but it doesn’t mean the Public Company Accounting Oversight Board is gone, or even remotely out of business.

“The Supreme Court's decision in the Free Enterprise Fund case held that the restrictions on removing the members of the PCAOB were unconstitutional as a violation of the separation of powers,” said Jeff Ott, a partner at Warner Norcross & Judd.

“What the Court did, however, was to sever that provision from the rest of the Sarbanes-Oxley Act and leave the rest of the act in place as it currently stands. By doing so, members of the PCAOB may now be removed at will, instead of only for cause,” and the result “leaves the statute substantially in place, unchanged,” said Ott.

John Chism, partner at Plante & Moran in Grand Rapids, said that from a truly practical standpoint, the Supreme Court ruling “will have no impact on how public companies comply with or are governed by Sarbanes-Oxley. Of greater value is the proposed law change to exempt smaller public companies — those with public float under $75 million — from having to have their auditors attest to their internal controls,” said Chism.

“This proposal seems to have strong support in Congress and would have a significant cost savings for smaller public companies, and may also encourage companies contemplating going public to do it in the U.S., rather than elsewhere,” he added.

The Sarbanes-Oxley Act was passed by Congress in response to corporate accounting scandals revealed in the wake of the Enron and Worldcom failures, and others. The oversight board was created by the Securities and Exchange Commission to enforce the act.

The Free Enterprise Fund sued the oversight board, claiming it violated the constitutional doctrine of separation of powers because it was not subject to presidential oversight and control.

The Free Enterprise Fund bills itself as a nonprofit advocacy group dedicated to fighting Sarbanes-Oxley, and states on its website that “the cure” to the Enron-era accounting scandals “proved to be worse than the disease. Sarbanes-Oxley has been a disaster for American businesses, with yearly auditing costs averaging a staggering $1.34 million, more than quadrupling the costs before the law’s implementation.”

The Center for Audit Quality in Washington issued a statement lauding the Supreme Court’s decision. The center, which is affiliated with the American Institute of Certified Public Accountants, said the “evidence demonstrates that audit quality and investor confidence have improved since the board’s creation.”

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