WASHINGTON -- The Supreme Court said today that it will rule on the constitutionality of the anti-fraud law that grew out of accounting scandals at Enron Corp. and other companies.
The justices said they will consider a challenge to the Sarbanes-Oxley law from pro-business conservatives, who complained that the board established by the law to oversee the accounting industry violates the constitutionally mandated separation of powers.
The law had been upheld by a federal appeals court in Washington.
The opponents argue that the makeup of the accounting board violates the separation of powers doctrine because its members aren't appointed by the president and cannot be removed by him, and Congress cannot control its budget.
The chairman of the Public Company Accounting Oversight Board and the other four directors are appointed by the Securities and Exchange Commission, an independent federal agency. The accounting board is funded by fees on publicly traded companies according to their size.
Congress created the board to replace the accounting industry's own regulators amid the business scandals, giving it subpoena power and the authority to discipline accountants.
The corporate scandals of 2001-2002 at Enron, WorldCom Inc., Tyco International Ltd. and other big corporations exposed inadequate internal controls and auditors at major companies who had become too cozy with the corporations whose books they examined.
In addition to the oversight board, the 2002 law required greater financial disclosures and increased the criminal penalties for securities fraud. The law could be invalidated if any of its sections are found to be unconstitutional. Opponents want it sent back to Congress for a revision.
Business interests, especially smaller public companies, have complained about the costs of complying with a key part of the Sarbanes-Oxley law: the requirement to file reports on the strength of their internal financial controls and fix any problems.
The Free Enterprise Fund, an anti-tax group, has been leading the challenge. Beckstead & Watts LLP, a small Nevada accounting firm, also is a plaintiff in the case. The oversight board inspected the firm in 2004 for compliance with Sarbanes-Oxley and launched a disciplinary investigation based on that review, which identified eight audits that said the firm didn't obtain sufficient evidence to support its opinion on its clients' financial statements.
The case is Free Enterprise Fund v. Public Company Accounting Oversight Board, 08-861.
