We all know the old saying, "Don't throw the baby out with the bathwater." It's common sense, and it usually makes for sound legal decisions, too. Nobody really wants to think about the consequences of doing otherwise. And yet, as many waited for the U.S. Supreme Court to hand down one of its final decisions for the year in Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB), there was a palpable concern that that exact thing might happen.
The bathwater in question was the constitutionality of board member appointments to the PCAOB (the centerpiece of the Sarbanes-Oxley Act of 2002, it is responsible for setting auditing standards and oversight of the public company auditing profession). The baby, in this instance, was the audit quality and investor confidence that have improved since the reforms of SOX were put into place.
Some feared that a broad challenge to the validity of the PCAOB would result in the Court ruling that all of SOX was unconstitutional. The Court, to its credit, refused to do so. Rather, in a 5-4 decision the justices decided that PCAOB board members could be removed from their roles by the SEC "at will." In doing so, the Court clearly reaffirmed all other provisions of the law, including the ongoing role of the PCAOB itself.
Setting aside the fanciful interpretation of plaintiff's counsel, thoughtful observers realize this is a win for investors.
There is little question that since its enactment, SOX has played a significant role in helping to restore the confidence of the investing public that was badly shaken by corporate scandals. In fact, a CAQ survey of investors found that a majority thought the law was a good idea. And as we observed in our friend of the court brief submitted last October, "Although only a few years have passed since the passage of SOX, the evidence demonstrates that regulation by the PCAOB has led to substantial progress in meeting Congress's goals of improving audit quality and increasing investor confidence."
I'm pleased that the Supreme Court's decision will allow the continued operation of the PCAOB without the need for operational changes or legislative action. The narrow ruling handed down by the justices clearly severs the PCAOB board member removal process from the rest of SOX and reaffirms all provisions of the law except for the power to remove the board members. Importantly, the Court's decision will prevent any disruption to the key activities of the PCAOB including setting auditing standards and the public company audit oversight process, critical factors in the continued strength and stability of our capital markets. "The Sarbanes-Oxley Act remains 'fully operative as a law' with these tenure restrictions excised," wrote Chief Justice John Roberts in the majority opinion.
Investors can breathe a sigh of relief. The baby is safe. And, in the words of SOX authors former Senator Paul Sarbanes and former Representative Mike Oxley, "the Board's essential protections of American investors will continue."
Cindy Fornelli serves as executive director of the Center for Audit Quality, a Washington, D.C.-based public policy organization serving investors, public company auditors and the markets.