Supreme Court Could Prove to Be PCAOB’s Undoing

The Public Company Accounting Oversight Board is facing an uncertain future after several justices on the high court appeared to side with the accounting firm and conservative group that hope to prove the board is unconstitutional.

Some of the questioning by Justices Samuel Alito, John Roberts and Antonin Scalia indicated some support for at least restructuring the board, or overhauling the process for appointing or firing its members (see Supreme Court Questions PCAOB’s Constitutionality). Several of the conservative justices are proponents of the theory of a “unitary executive” branch with unfettered power to hire or fire officials at independent agencies.

In the case, the Free Enteprise Fund and accounting firm Beckstead & Watts are suing the PCAOB on the grounds that the separation of powers principles render the board unconstitutional, as the members of the board can only be fired for cause. “The president can’t remove the SEC commissioners at will,” said Roberts. “They can’t remove the PCAOB at will.”

The outcome of the case could potentially affect other “independent” agencies such as the Federal Trade Commission and the Federal Communications Commission. However, as with many cases on the court, there’s a group of justices who already appear to be lining up on the other side of the issue, including Stephen Breyer, Ruth Bader Ginsburg and Sonia Sotomayor. “What is the difference between what you are talking about and an employer who says, look, I can't stick my nose in every bit of business that goes on in my office because that's impossible; otherwise I would be doing all the work and I just humanly can't. I'm delegating to you the responsibility to do X, Y, and Z according to these rules of conduct,” Sotomayor said to the plaintiff’s attorney.

As usual, Justice Anthony Kennedy may well be the swing vote. But that could be a problem for the PCAOB, as his former law clerk, Brett Kavanaugh, is now an appeals court judge who ruled in favor of the plaintiffs earlier in a dissenting opinion. The majority on his court ruled with the PCAOB that time, but Kennedy may be more in sympathy with his former clerk’s opinion. His stance was not easy to divine, as most of his questions seemed to be an effort to find out more about the workings of the PCAOB and how the president’s removal power might work in the case of such an agency.

However, Kennedy pressed the PCAOB’s attorney on how he saw the relationship of the president to an independent agency. “This isn't subject to the operations of the president, if he has to go through an independent agency,” he said. “Are you encouraging the president, on an ongoing, daily basis, to instruct an independent agency what he wants done?”

While it is unlikely that the president would be instructing the PCAOB on how to handle an inspection report of an accounting firm that failed to identify a deficiency in internal controls, the Supreme Court may ultimately put the president in a position to nix the appointment or reappointment of the board members and perhaps even change the structure and duties of the board.