NU Online News Service

The Supreme Court, in a divided ruling on Monday, said part of the Sarbanes-Oxley Act of 2002 is "incompatible" with the Constitution.

The majority opinion written by Chief Justice John Roberts found that the Public Company Accounting Oversight Board (PCAOB), created as part of the act, violated separation of powers principles in the Constitution. The act makes it so the president "is no longer the judge of the board's conduct," Justice Roberts wrote, and therefore it is too difficult for the president to remove board members, who are appointed by the U.S. Securities and Exchange Commission.

"[The president] can neither ensure that the laws are faithfully executed, nor be held responsible for a board member's breach of faith," Roberts wrote for the 5-4 majority. "Such diffusion of power carries with it a diffusion of accountability; without a clear and effective chain of command, the public cannot determine where the blame for a pernicious measure should fall."

The Free Enterprise Fund, a nonprofit organization focused on limited government and tax relief, sued the PCAOB and looked for an injunction on the grounds it was unconstitutional, according to court records.

The Supreme Court agreed to hear the case more than a year ago, according to the organization, which calls the act a "productivity killer" and claims it costs the economy about $35 billion each year.

The high court affirmed other Sarbanes-Oxley provisions and said the act remains operative with the change to how PCAOB board members may be replaced.

According to the court's decision, the SEC, which has oversight authority over the board, can now remove members of the board at will.

Previously, the SEC had to show "good cause" to remove PCAOB board members.

The opinion does not call into question any action taken by the PCAOB since its inception, said the SEC.

"The PCAOB is a cornerstone of the Sarbanes-Oxley Act and serves a critical role in promoting investor protection and audit quality," said SEC Chairman Mary L. Schapiro. "We look forward to continuing to work with the board in connection with its mission to oversee auditors in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports."

The PCAOB oversees accounting firms as auditors of public companies. James L. Kroeker, chief accountant for the SEC, said audit firms remain subject to inspection and are still required to register with the board.

Former Sen. Paul Sarbanes and former Rep. Michael Oxley, who sponsored Sarbanes-Oxley in the Senate and House respectively, issued a joint statement that said, "The PCAOB enjoys widespread support from investors as well as from the accounting profession. The decision from the Supreme Court adjusts the law in a way that allows the PCAOB to continue to ensure the integrity of public company audits. The board's essential protections of American investors will continue.

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High Court: Part Of SOX &#039;Incompatible&#039; With Constitution

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High Court: Part Of SOX 'Incompatible' With Constitution