The Supreme Court today issued a ruling in Free Enterprise Fund et al v. Public Company Accounting Oversight Board et al and upheld the Sarbanes-Oxley Act of 2002.
The court did take issue with the way PCAOB members could be removed, and ruled that board members could be removed “at will” by the commissioners of the Security and Exchange Commission. In the majority opinion, Chief Justice Roberts wrote that, despite the unconstitutional tenure provisions, the Act remains “fully operative as a law.”
So what does this mean? Congress clearly tried to insulate the PCAOB from the political whims of the executive office, passing the Act, as it did, during an administration skeptical of regulation. Roberts’ court handed advocates of executive power a victory by ruling that dual for-cause limitation on the removal of officers is not constitutional and that the president must have a direct line to remove officers of the government, which the Board members were determined to be.
However, given the current administration’s concern about corporate accountability and the integrity of financial risk reporting in general, it would be very surprising if SEC Chair Mary Shapiro were to exercise her new found power and replace Board members with someone more lenient on the accounting firms. And, AS5 really took the heat off of corporate America vis-a-vis their auditors, anyway; the SEC’s the one that carries the big stick with regard to the integrity of financial controls.
Further, more and more SOX efforts are being rolled into a comprehensive program of managing risks enterprise-wide. Companies are more interested in broadening the application of the approaches, tools and techniques for testing financial controls to their broader control environment. The net here is that the Supreme Court’s ruling will probably have little to no effect on how companies actually manage their risk with respect to financial reporting.