The three amicus briefs filed so far with the US Supreme Court in an action testing the PCAOB’s constitutionality have all supported the audit firm seeking to have the Board declared unconstitutional. The audit firm has asked the Court to hear an appeal from a panel of the US Court of Appeals for the District of Columbia that ruled the Board was constitutional. The government’s response brief has not yet been filed. The Court granted the government an extension of time in which to file its brief until April 10, 2009. Free Enterprise Fund and Beckstead & Watts LLP v. PCAOB, 08-861.
The panel ruled that the PCAOB is constitutional and rejected claims that SEC rather than Presidential selection of Board members violates the Constitution. The panel concluded that Board members are inferior officers of the United States within the meaning of the Appointments Clause; and thus properly appointed by the SEC. The fact that the Sarbanes-Oxley Act limited the SEC’s authority by providing that Board members can only removed for cause did not elevate Board members to the status of principal officers of the US worthy of presidential appointment. Despite the for-cause removal, said the panel, the fact remained that the Act gave the SEC comprehensive and pervasive control of the PCAOB, including the approval of the Board’s budget.
The US Court of Appeals for the DC Circuit, by a 5-4 vote, denied full or en banc review of the split panel decision. Given the fact that four circuit judges wanted a full review of the constitutional issues surrounding the Board’s creation made it almost certain that Supreme Court review would be sought
In their brief, the Washington Legal Foundation argued that the PCAOB was established by Congress in a manner that violates separation-of-powers principles. Members of the PCAOB, a board that has been given extraordinary powers to supervise the audits of public companies, are selected not by the President but by the SEC, said the brief. Moreover, PCAOB members may be removed from office only by the SEC and only for cause; and the SEC Commissioners themselves may be removed from office by the President only for cause.
The WLF argued that this structure removes the PCAOB from any effective control by the President who, under Article II of the Constitution, is supposed to control the entire executive branch. WLF also contended that this structure violates separation-of-powers principles embodied in the Constitution.
Urging the Court to grant review, the WLF also argued that the structure of the PCAOB is unconstitutional because it interferes with the President's power to remove Executive Branch officials. The Constitution requires the President to retain such powers to ensure that he remains politically accountable for all executive branch actions. WLF conceded that the Constitution permits Congress to impose some controls on the removal power, by, for example, providing that certain officials in so-called independent agencies may only be removed for cause. But the foundation said that Congress went too far by providing that the SEC Commissioners, the only officials who may remove PCAOB officials, are themselves significantly protected from Presidential control because they may only be removed by the President for cause. The foundation called this double layer of protection for officials nominally within the executive branch ``an unprecedented impingement’’ on the President's removal powers.
The WLF also maintained that the PCAOB violated the Constitution's Appointments Clause, which provides that all federal officials are to be appointed either by the President or by a department head. The foundation contended that the five SEC Commissioners cannot be deemed a collective department head for purposes of the Appointments Clause. Thus, the SEC has no constitutional authority to appoint PCAOB officials.
Similarly, the American Civil Rights Union argued that the case presents a dangerous precedent for Congressional authority to rewrite the Constitution and its Separation of Powers, providing for sharply reduced Presidential power and control over its own executive branch. The President’s power and authority over the PCAOB could not be more thoroughly removed, said the brief, which added that Judge Kavanaugh, who dissented in the panel opinion, rightly characterized the PCAOB as an independent agency appointed by and removable only for cause by another independent agency.
The amicus brief also applauded Judge Kavanaugh’s statement that by restricting the President’s authority over the Board, Sarbanes-Oxley renders the PCAOB unaccountable and divorced from Presidential control to a degree not previously countenanced in our constitutional structure. The brief, again citing Judge Kavanaugh’s dissent, also argued that, because PCAOB members are principal officers of the US, they must be appointed by the President with the advice and consent of the Senate. Thus, the fact that Board members are appointed by the SEC alone violates the Appointments Clause.