WASHINGTON, D.C. — The U.S. Supreme Court takes up a case today examining the extent to which Congress can create an independent watchdog agency insulated from direct presidential control and political accountability.
At issue is whether Congress unconstitutionally intruded into executive branch authority when it created the Public Company Accounting Oversight Board (PCAOB).
The case represents the latest battleground in a long-running dispute among legal scholars over whether there should be a bright line separating presidential power from congressional power, or whether that line can sometimes be blurred when Congress seeks to create independent agencies that operate at the murky intersection between the executive branch and the legislative branch of government.
In broad terms, the case, Free Enterprise Fund v. Public Company Accounting Oversight Board, is about the structure of American government and how rigorously the Supreme Court believes that structure is to be enforced. More narrowly, the case is about a little-known accounting oversight board with some big powers.
Case began with Enron scandal
The oversight board was established in 2002 as part of the Sarbanes-Oxley Act passed in the wake of the accounting scandals at Enron and other companies. The oversight board is designed to conduct aggressive audits of publicly-traded companies. It was intended to help keep corporate officials honest and investors better apprised of a firm’s financial health.
To avoid potential influence of the accounting industry, Congress decided that the five members of the oversight board should be appointed by the Securities and Exchange Commission. The SEC supervises the board’s activities and may remove board members, but only if they have acted improperly rather than for mere policy differences.
The key question in the case is whether appointment of the oversight board by the SEC rather than the president violates the Constitution’s required separation of powers by insulating the board from presidential supervision and control.
“Separation of powers protects the liberty and security of the people by denying the legislature a role in the enforcement of the laws it enacts,” writes Washington lawyer Michael Carvin in his brief to the court.
“In vesting the executive power in a single president,” Carvin adds, “the framers sought to ensure accountability at the ballot box and the ability to resist legislative encroachments.”
Carvin represents an accounting firm and a non-profit organization that filed suit in federal court challenging the constitutionality of the oversight board. They allege that the board was created in violation of the Constitution’s appointments clause and the separation of powers.
Since the president does not appoint board members directly and thus cannot remove them directly, they exist outside his sphere of executive authority, they say.
Accountability through the SEC?
Lawyers for the oversight board and the U.S. Solicitor General argue that the board members are accountable to the president through their appointment via the SEC. The president would be able influence policy or remove oversight board members through the chain of command by directing the SEC to take such action, they say.
“Congress designed the board to be independent from the accounting profession, not to reduce the president’s power or to aggrandize its own,” writes Washington lawyer Jeffrey Lamken in his brief on behalf of the oversight board.
“Congress lodged comprehensive oversight control over the board in the SEC, while leaving the president’s authority over the SEC undiminished,” he said.
Carvin counters that any exertion of presidential authority over the accounting board is diluted by having to pass through the SEC. He said a presidential attempt to remove members of the oversight board could involve also having to remove SEC commissioners. But since SEC commissioners require Senate confirmation, Congress would hold a potential veto over any presidential attempt to affect a double removal at both the SEC and the oversight board.
Carvin says a presidential threat to remove an SEC commissioner may not be enough to achieve the president’s goals at the oversight board. “The president needs the power ‘to remove,’ not to bluster about it,” Carvin writes.
New York Stock Exchange model
He notes that the oversight board was patterned on the New York Stock Exchange, which is also overseen by the SEC. “It is indisputable that the president cannot control or supervise the officers or policies of the New York Stock Exchange, notwithstanding the SEC’s pervasive regulatory control over that entity,” Carvin says.
Solicitor General Elena Kagan says in her brief that the SEC does, in fact, exert comprehensive control over the oversight board. The SEC can reject board-adopted rules, refuse to issue a subpoena for a board investigation, reverse any board enforcement decision, reject the board’s budget, and remove board members for cause.
She says rather than being “principal officers” of the executive branch subject to presidential appointment and Senate confirmation, oversight board members are “inferior officers” whose work is supervised by others who were appointed by the president and confirmed by the Senate.
Legal experts note that should the Supreme Court find the oversight board unconstitutional, Congress could easily remedy the infraction by amending the Sarbanes-Oxley Act to include a requirement that board members be appointed by the president and confirmed by the Senate. Another alternative, analysts say, would be to merge the oversight board into the SEC with board members becoming SEC employees.
On the other hand, if the high court issues a decision strongly upholding the insulated structure of the oversight board, it could open the way for Congress to create more independent watchdog groups — and a new level of government regulation insulated from elected officials, analysts say.