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PCAOB, SOX Survive Supreme Court Scrutiny

Even though the Public Company Accounting Oversight Board technically lost a Supreme Court ruling Monday, the board is likely to emerge stronger now that the element of uncertainty has been removed.

Despite the challenge to the PCAOB's inherent constitutionality, as well as the Sarbanes-Oxley Act that first established the board back in 2002, the PCAOB will probably find itself come out relatively unscathed from the high court's decision. In the 5-4 decision, the majority on the court found fault only with the way in which board members can be removed. Now, instead of the Securities and Exchange Commission being able to remove PCAOB members only for cause, just as SEC commissioners can only be removed for cause by the President, PCAOB board members now can be removed at will by the SEC commissioners.

That could make the jobs of the board members potentially shorter-term than they might otherwise prefer, but in the real world, it is difficult to imagine Mary Schapiro screaming, "Off with their heads," whenever she is displeased with the latest auditing standards on engagement quality review.

SOX too has been strengthened in some ways, even with the justices striking down one of its provisions. The lawsuit by the Free Enterprise Fund and the Henderson, Nev., accounting firm of Beckstead & Watts had the potential to undo not only the PCAOB, but also many of the regulations and determinations of the board, not to mention other SOX provisions regulating the accounting profession.

However, the court took a measured approach in its decision, striking down one provision of SOX, but leaving the rest of it largely intact. The practical impact may not be far-reaching right away, but it could establish a precedent for future litigation.