Justices questioning audit board makeup

Hearing arguments yesterday in Washington, several justices suggested that the Public Company Accounting Oversight Board lacks the presidential oversight required under the Constitution for executive branch agencies.

“As a practical matter, does the president have any ability to control what the board does?’’ Justice Samuel Alito asked.

A ruling striking down the board would leave it to Congress to reestablish the panel with tighter oversight, setting up a legislative fight that might sweep in other aspects of Sarbanes-Oxley. Congress already is considering exempting small companies from audit requirements, and banks are seeking to limit fair value accounting practices that require assets to be marked down to reflect market prices.

The oversight board, which replaced a system of self-regulation by the accounting profession, is a private organization that performs government-type functions. At least some of the board’s activities are supervised by the Securities and Exchange Commission. The extent of the SEC’s oversight emerged as a pivotal question in the hearing.

US Solicitor General Elena Kagan defended the oversight board, saying the SEC exercises “comprehensive’’ control over its activities, including the auditing standards it issues and the enforcement actions it takes.

Justice Anthony Kennedy, potentially the case’s swing vote, questioned whether the SEC is in a position to oversee the board’s investigations. “The history and tradition of boards like this is that their investigative powers are independent,’’ he said.

Justice Ruth Bader Ginsburg signaled she would back the board, saying “the SEC really could stop anything,’’ including unwarranted investigations. She and Justice Stephen Breyer both said the board does not have the power to issue a subpoena.

The oversight board draws up its budget, sets board member salaries, and funds its work by imposing fees on public companies. The board has issued a series of accounting standards and taken 25 enforcement actions.

The Supreme Court said in 1935 that independent agencies are constitutional even if the president has only limited power to fire their leaders. That ruling spawned what has become known as the fourth branch of government.

A Nevada accounting firm and a small-government advocacy group are challenging the board, saying it goes beyond other independent agencies through the combination of its power and its lack of political accountability. The challengers’ lawyer, Michael Carvin, argued that no elected representative “has any influence over the people appointed to this board.’’

Board members are appointed by the SEC, not the president, and are removable only for cause. The SEC is an independent agency whose members the president cannot remove without cause.

The legislation setting up the board “goes further because you’ve got to rely on the SEC to get to the board,’’ Chief Justice John Roberts said yesterday.