WASHINGTON (Reuters) - A federal appeals court has upheld the validity of the national board overseeing the audit industry, rejecting a challenge by a conservative activist group.
The U.S. Court of Appeals for the District of Columbia Circuit ruled on Friday that the law creating the Public Company Accounting Oversight Board “does not encroach upon” the Constitution nor does it violate the separation of powers clause.
The Free Enterprise Fund and a small audit firm filed a lawsuit in 2006 seeking to shut down the PCAOB on constitutional grounds, claiming it did not allow adequate control by the U.S. president.
It contended the board violates separation of powers principles as a semi-government agency lacking proper checks and balances.
The PCAOB polices the U.S. audit industry, including the Big Four firms that review the books of major corporations: Ernst & Young LLP ERNY.UL, KPMG KPMG.UL, PricewaterhouseCoopers PWC.UL and Deloitte & Touche LLP DLTE.UL.
The 2002 Sarbanes-Oxley law, set up in response to the auditing scandals earlier in the decade of Enron Corp ECSPQ.PK and others, created the board.
At present, the board’s members are appointed by the Securities and Exchange Commission, with consultation from the Federal Reserve Board and the U.S. Treasury Department. The SEC’s five commissioners are appointed by the White House with Senate consent.
The court, in a 2-to-1 panel decision, said prior Supreme Court rulings on the president’s relationship with administrative agencies backs the board’s set-up.
The Competitive Enterprise Institute, a conservative group that backed the lawsuit against the PCAOB, said a petition for a rehearing by a full circuit court was likely.
The SEC in a statement said the board’s existence is “vital to protecting investors and furthering the public interest.”
The PCAOB said in a statement it is “gratified” by the court’s decision.
Reporting by Kim Dixon; Editing by Andre Grenon