Court upholds SOX challenge.

• Author: Swartz, Nikki
• Position: UP FRONT - Sarbanes-Oxley Act of 2002 - Beckstead and Watts and Free Enterprise Fund files suit against Public Company Accounting Oversight Board

A three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit has upheld a challenge to the validity of the Sarbanes-Oxley Act of 2002 (SOX), noting that the act and the Public Company Accounting Oversight Board (PCAOB) do not violate the U.S. Constitution.

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Nevada-based accounting firm Beckstead and Watts and the Free Enterprise Fund, a pro business advocacy organization, filed suit against the PCAOB, arguing that SOX overstepped its constitutional authority by setting up the nonprofit PCAOB as the primary standards-setting and enforcement authority for firms that audit public companies. The plaintiffs specifically argued that the creation of the PCAOB violated the separation of powers clause in the U.S. Constitution, as its authority was outside of the executive branch's authority and control.

The court rejected the argument, indicating that the U.S. Supreme Court had upheld the creation of independent agencies more than 70 years ago. The court also pointed out that the Securities and Exchange Commission (SEC) has authority over the PCAOB, including the power to approve PCAOB rules and strike down any sanctions imposed by the board.

SOX was enacted with broad bipartisan support in the aftermath of the Enron and WorldCom accounting scandals. Beckstead and Watts was subject to PCAOB sanctions. In its suit, the firm argued that the PCAOB accusations against it caused harm to its...