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Saturday, April 13, 2024 | Back issues
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Financial Oversight Board Challenged in High Court

WASHINGTON (CN) - A government oversight board established in the wake of the Enron accounting scandal was challenged in the Supreme Court Monday by a publically traded company claiming the board is illegitimate and accountable to no one, not even the president, an argument well received by conservative justices.

The Public Company Accounting Oversight Board was created under the Sarbanes-Oxley Act of 2002 to better audit public companies in the wake of the Enron and Worldcom accounting scandals. The board operates under the aegis of the Securities Exchange Commission.

The Free Enterprise Fund and one of its members, Beckstead and Watts were represented by Michael Carvin from Jones Day. They argued against the board's legitimacy, saying Congress violated the constitutional separation of powers when it put the board under the direction of the independent SEC, and held that the president should have more control over the board.

They added that improper oversight can create an unaccountable system.

Solicitor General Elena Kagan argued on behalf of the Obama administration and maintained that the president has adequate control over the accounting board through its control of the SEC.

Conservative-leaning justices appeared most critical of the government's argument.

Justice Antonin Scalia voiced his doubt, saying that the president can only control the SEC by dismissing its chairman, and noting that it's the SEC members, not the chairman, who select the accounting board.

But instead of questioning the president's power to dismiss members, Justice Samuel Alito skeptically probed the extent of the president's power over the board, asking if he could limit the more than $500,000 salary of the board members.

Kagan replied that the president could call one of the members of the SEC and ask that the salaries be changed.

Scalia was quick to draw on his satire. "I could do that," he said to laughter.

Alito pressed on. "Does the president have any ability to control what the board does?" he asked. Kagan replied that the president controls the board as much as any other part of the SEC.

Chief Justice John Roberts appeared unconvinced. "Oh, no, no, because you have got an extra layer there," he said, referring to the president's inability to directly remove members from the board.

The more liberal judges, on the other hand, appeared more accepting of the board's legitimacy, and that it is adequately controlled.

Justice Ruth Bader Ginsburg suggested that the board is simply an extension of the SEC, challenging the proposal that it be treated like its own regulatory agency. "This is a board that has a relationship with the SEC, where it can't do anything that doesn't have the SEC's approval," she said.

Justice Sonia Sotomayor responded to the argument that the board might already be acting too independently. "What is the difference between what you are talking about and an employer who says, 'look, I can't stick my nose in every bit of business that goes on in my office because that's impossible?'"

Sotomayor asked, "Is it unconstitutional for the President not to be able to appoint an inferior officer?" Carvin, representing the private companies, replied that it isn't.

A case summary distributed by the Supreme Court claims that the two enterprises have several significant obstacles in winning the case. First, the Court might dismiss the case because the two enterprises did not exhaust their administrative remedies, going instead directly to court.

They also lodged a facial challenge, meaning the two enterprises are burdened with showing that the accounting board's structure is unconstitutional in every way applicable, that it cannot operate while following the constitution. How the board is actually structured, or how it actually interacts with the SEC is irrelevant.

The D.C. Circuit ruled that the failure of the companies to work out the problem administratively first was not cause to dismiss the case, but decided that the structure of the board is not unconstitutional.

The president can remove members of the SEC if he provides reasons, but because the board is under of the SEC, the president cannot appoint or remove the members of the board. Only members of the SEC can do this.

The board is governed by the SEC, but is uniquely independent in that the SEC cannot remove members of the board without a cause.

The Free Enterprise Fund is a nonprofit group that says it promotes economic growth, lower taxes, and limited government. Beckstead and Watts LLP is one of the fund's members and had been under investigation by the board when it joined in filing suit.

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