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June 27, 2010

PCAOB appointment structure unconstitutional

The US Supreme Court has ruled the Public Company Accounting Oversight Board (PCAOB) can continue to function despite ruling its board members are being appointed unconstitutionally.

The PCAOB’s appointment structure and the circumstances under which board members can be removed had been challenged by advocacy group Free Enterprise Fund and Beckstead & Watts, a small Nevada accountancy firm.

In a 5-4 decision, the Supreme Court ruled that the method of appointing PCAOB members under the Sarbanes-Oxley Act of 2002 was unconstitutional as the members can only be appointed and removed by the Securities and Exchange Commission, US media reports.

This violates the nation’s separation of powers principle as it strips the president of power to appoint or remove board members or to supervise their activities.

The court declined to allow a broad injunction against the PCAOB’s continued operation.

In the lead up to the hearing, there were concerns that a ruling against the PCAOB could bring down the Sarbanes-Oxley Act. Instead, the court determined to sever the specific provisions outlining the appointment and removal of PCAOB members from the rest of the Sarbanes-Oxley Act, a suggestion provided by the government.

The plaintiffs had already lost the case in two lower courts.


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