WASHINGTON -- The U.S. Supreme Court will rule on the validity of a landmark anti-fraud law that served as Congress' response to the wave of corporate scandals starting with Enron.
The justices said Monday they will consider a constitutional challenge to the 2002 Sarbanes-Oxley law from pro-business conservatives, who complained that the board established to oversee the accounting industry violates the constitutionally mandated separation of powers.
The law reshaped corporate governance after the accounting scandals of 2001-2002 at Enron Corp., WorldCom Inc., Tyco International Ltd. and other major corporations exposed inadequate internal controls and auditors who had become too cozy with the companies whose books they examined. The law was upheld in a 2-1 ruling by a panel of a federal appeals court in Washington last August.
The opponents first brought their case in 2006, predicting that it likely would end up before the Supreme Court. They argue that the makeup of the accounting board violates the separation of powers doctrine because its members aren't appointed by the president, cannot be removed by him, and Congress cannot control its budget.
The Securities and Exchange Commission, an independent federal agency, appoints the chairman and four directors of the Public Company Accounting Oversight Board. The accounting board is funded by fees on publicly traded companies according to their size.
Congress created the board to replace the accounting industry's own regulators amid the business scandals, giving it subpoena power and the authority to discipline accountants.
"We remain confident that the PCAOB's structure is constitutional and look forward to our opportunity to demonstrate that in the Supreme Court," Colleen Brennan, a spokeswoman for the board, said Monday.
SEC spokesman John Nester said the agency agrees with the appeals court's ruling and believes that "Congress acted properly and within its constitutional authority when it established the accounting oversight board to protect investors."
"We look forward to presenting our arguments to the Supreme Court," he said in an e-mailed statement.
In addition to the oversight board, the 2002 law required greater financial disclosures and increased the criminal penalties for securities fraud. The entire law could be invalidated if any of its sections are found to be unconstitutional. Opponents want it sent back to Congress for a revision.
Business interests, especially smaller public companies, have complained about the costs of complying with a key part of the Sarbanes-Oxley law: the requirement to file reports on the strength of their internal financial controls and fix any problems.
The Free Enterprise Fund, an anti-tax group, has been leading the challenge. Beckstead & Watts LLP, an accounting firm based in Henderson, Nev., that specializes in audits of small public companies, also is a plaintiff in the case. The oversight board inspected the firm in 2004 for compliance with Sarbanes-Oxley and launched a disciplinary investigation based on that review, which identified eight audits that said the firm didn't obtain sufficient evidence to support its opinion on its clients' financial statements.
"I am thrilled to learn today that the Supreme Court has accepted our case against the PCAOB," managing partner Brad Beckstead said in a statement on the firm's Web site. "The costs to comply with (Sarbanes-Oxley) are a 'barrier to entry' for small entrepreneurial and developing companies. We must continue to fight against the burdens of overregulation on small business and hold the PCAOB accountable to the public."
Associated Press writer Mark Sherman contributed to this report.