The Supreme Court ruled this morning to uphold the tenets of the PCAOB and Sarbanes-Oxley rule in the Sarbanes Oxley Act of 2002 (SOX), Free Enterprise Fund v. Public Company Accounting Oversight Board. However, the Free Enterprise Fund and others could stage a shareholder campaign to remove board members, the high court said.
Commenting on the case, Cindy Fornelli, executive director of The Center for Audit Quality said: "CAQ is pleased that the U.S. Supreme Court's decision will allow the continued operation of the PCAOB. This narrow decision 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."
From the perspective of the fund management industry, Fornelli said, "This should further instill confidence in the market, for investors and the capital markets" and the Supreme Court's upholding of Sarbanes-Oxley is a positive development since "investors value SOX and PCAOB's oversight function."
Arguing the case for the Free Enterprise Fund, an anti-big government and taxes ’40 Act fund, were Sam Kazman and Hans Bader, attorneys with the Competitive Enterprise Institute. CEI argues that the way in which PCAOB board members are appointed violates the appointments clause of the United States Constitution.
CEI claims the ramifications of the case extend far beyond the investment mandate of the Free Enterprise Fund to how government officials and regulatory bodies, such as the PCAOB created under SOX, “are answerable to the American people” and make it easier for entrepreneurs and investors. The attorneys note that SOX, or “Sarbox,” made it difficult for a mass-market company like Google to report its IPO financials under the law.
Indeed, Speaker of the House Nancy Pelosi has come out in favor of a modified Sarbanes-Oxley and Carl Schramm, president the Kauffman Foundation, dedicated to entrepreneurship, said: “Since shareholders are the intended beneficiaries of Sarbox, why not let them vote on whether their company needs to comply with some or all of its provisions—the expensive requirement for auditing of internal controls, in particular.
“We suspect that many shareholders would choose some form of opt-out, and in so doing, would enable more growing companies to continue growing as independent firms, rather than being bought out by larger companies that can intentionally or unintentionally rob the firms of the entrepreneurial magic that made them successful in the first place,” Schramm said.
However, the two namesakes for Sarbanes-Oxley, Congressmen Paul S. Sarbanes and Michael G. Oxley, issued a joint statement applauding the high court's decision: "The PSAOB provides essential protectiosn to the more than half of American households that invest savings in securities. It ensures the integrity [and continuation] of public company audits and, thereby, the accuracy of financial reporting.
"The Board's essential protections of American investors will continue," Mssrs. Sarbanes and Oxley said.