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Supreme Court affirms authority of accounting oversight board

June 29, 2010|By Walter Hamilton and David G. Savage, Los Angeles Times

Reporting from Los Angeles and Washington —

The Supreme Court largely affirmed Monday the legitimacy of an accounting regulator created by a post-Enron antifraud law, striking down only a minor provision of the statute.

The Public Company Accounting Oversight Board was established in 2002 as part of the Sarbanes-Oxley law, which Congress passed after the Enron Corp. scandal exposed a wave of accounting chicanery used by some companies to pump up their stock prices during the late-1990s bull market.

The board has vast authority over the accounting industry to ensure that auditors do not sign off on questionable financial reporting to curry favor with the companies that hire them.

"There was the risk that the Supreme Court could have thrown oversight of public-company accounting into complete chaos had it found the existence of the board to be invalid," said Jacob Frenkel, a partner at Shulman Rogers Gandal Pordy & Ecker in Potomac, Md.

The lawsuit was filed by the nonprofit Free Enterprise Fund and an accounting firm whose auditing procedures had been criticized by the accounting board. They argued that Sarbanes-Oxley violated the Constitution's separation of powers provisions by giving too much power to a board that was not under the direct purview of the president.

The decision avoids a potential headache for the Obama administration, which is pressing forward with a far more sweeping rewrite of the nation's securities laws and could have been dogged by questions of constitutionality if the earlier law had been invalidated.

"I'm sure the administration is thrilled with the decision," said Robert Willens, an accounting expert in New York.

In a 5-4 ruling, the justices took issue with a provision of the law barring the Securities and Exchange Commission from firing members of the accounting board except "for cause."

By invalidating that provision, the court gave the SEC the power to remove board members at will, but left intact the rest of the law governing the board.

"The consequence is that the board may continue to function as before," Chief Justice John G. Roberts Jr. wrote in the majority opinion.

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