Lawsuit Questions SOX Legality

A lawsuit now before the District of Columbia Circuit could undermine the Sarbanes-Oxley Act of 2002, the law aimed at restoring investor confidence and strengthening corporate governance in the aftermath of the seismic accounting scandals that came to define the decade.

At issue is whether the Public Company Accounting Oversight Board (PCAOB), created under SOX to monitor the accounting profession, is constitutional.

The plaintiff is the Nevada-based accounting firm Beckstead & Watts. Lawyers for the firm--which include former U.S. Special Counsel Kenneth Starr and Georgetown Law Professor and former Assistant Attorney General Viet Dinh--argue that the PCAOB's "structure and operation, including its freedom from Presidential oversight and control and the method by which its members are appointed, contravene” the Constitution’s separation of powers principles and appointments clause.

The initial complaint was dismissed last year, but Beckstead appealed to the D.C. Circuit, where it's hoping it will be successful in removing the barriers for smaller firms burdened by the costs of complying with SOX, Brad Beckstead, managing partner of the firm, has said.

Washington Post

“Not only will it be put out of business,” she wrote, “but SOX in its entirety will fall.”

The law apparently lacks a severability clause. If PCAOB is shot down, some observers believe, so goes all of SOX.