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Supreme Court Rules Sarbanes-Oxley Constitutional With Minor Exception

06/29/2010 -Aside from a minor constitutional issue, the Supreme Court yesterday upheld the Sarbanes-Oxley Act of 2002. The law was passed in response to multiple corporate-accounting scandals—such as Enron, Tyco International, and WorldCom—at the dawn of the 21th century.

"The court ordered a change in oversight of the accounting watchdog created by the law, but it left intact the rest of the 2002 law," reports The Wall Street Journal's Erin White. The watchdog WSJ's referring to is the The Public Company Accounting Oversight Board (PCAOB), the nonprofit organization created to oversee accounting firms that audit publicly-traded companies.

(For Security Management coverage of Sarbanes-Oxley, clickhere.)

In the case, the plaintiffs, the Free Enterprise Fund, argued that the PCAOB was unconstitutional because its board members were appointed by the Securities and Exchange Commission (SEC) rather than by the president, thereby violating separation of power principles.

The hope for the law's critics was that the Supreme Court would take an axe to the PCAOB and the law rather than a scalpel. The Supreme Court, however, chose to play surgeon rather than executioner.

"Instead of throwing out the board or the entire Sarbanes-Oxley Act, as defenders of the law had feared, the court struck down only the part that said the Securities and Exchange Commissionneeds good cause to remove board members,"reports David S. Hilzenrath of The Washington Post.

Or asFortune's Legal Analyst Roger Parloff wrote: "Long story short, though the conservative wing of the Court, by a 5-4 margin, thought that there was a constitutional flaw in the way PCAOB was set up, it decided that the tainted provisions were 'severable' from the rest of the law. As a consequence, the rest of it remains in full force."

In the end, the only real effect the Court's ruling will have is on PCAOB members' job security. From now on, PCAOB members can be fired at will, when previously the SEC could only fire them "for cause," or after providing a specific reason why.

That decision could have reverberating effects across the federal government though. The Post notes the 5-4 decision "sowed doubts about the job security and legal authority of high-level government officials in agencies as varied as the Nuclear Regulatory Commission, the Social Security Administration, the Consumer Product Safety Commission and the Federal Trade Commission."

♦ Photo bykatmere/Flickr