Is PCAOB Constitutional?

Now that Jones v. Harris has been argued, we have to sit and wait for the decision. But there is another compliance case coming up for argument in front of the Supreme Court: Free Enterprise Fund v. PCAOB.

The PCAOB case is much sexier than the Jones case since it involves the president’s constitutional powers of appointment and the separation of powers under the Constitution. (At least as far as compliance is sexy.)

The November 2009 edition of the Vanderbilt Law Review has a quartet of articles that focus on the PCAOB case and the underlying constitutional issues:

• Putting Power Back Into Separation of Powers Analysis: Why the SEC-PCAOB Structure is Constitutional by Richard H. Pildes
• The “Principal” Reason Why the PCAOB Is Unconstitutional by Gary Lawson
• Remove Morrison v. Olson by Steven G. Calabresi & Christopher S. Yoo
• Bringing the Independent Agencies in from the Cold by Harold H. Bruff

Congress created the Public Company Accounting Oversight Board PCAOB under the umbrella of the Securities and Exchange Commission. If PCAOB is a government agency and its members are officers, then the appointment of the PCAOB is very odd. The President can appoint the SEC Commissioners, but only remove them “for cause.” Then in turn the SEC Commissioners appoint the PCAOB members.

The issues arises from the Appointments Clause of the U.S. Constitution U.S. CONST. Art. I, § 2, cl. 2;:

[The President] shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.

Are the PCAOB‟s Members “principal officers” of the United States, whose appointment must, be made by presidential nomination and Senate approval? Even if they are “inferior officers” of the United States, does PCAOB violate the Constitution‟s arrangement for the appointment and removal of such officers because they are put entirely in the hands of the SEC, an independent regulatory commission, beyond the effective reach of presidential oversight?

There are lots of interesting issues discussed in these articles and lots of interesting things the Supreme Court could do in its opinion for the PCAOB case. It could have broader implications to other government commissions, accountants and compliance professionals.