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.

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 reputation.

SEC Chairman Christopher Cox said in a written statement, "The commission believes that the PCAOB is a highly effective organization whose continued existence is vital to protecting investors and furthering the public interest in the preparation of accurate and informative audit reports."

Brad Beckstead, managing partner of Beckstead and Watts, issued a statement in response to the decision, saying that "the costs to comply with the Sarbanes-Oxley Act of 2002 are a 'barrier to entry' for small entrepreneurial and developing companies. Inclusive in those costs are the regulatory burdens for auditors of small companies to comply with the standards established by the PCAOB. Auditors ultimately pass those compliance costs to their clients by driving up audit fees. Consequently, the burdens have pushed the majority of micro-cap and 'development stage' companies either out of business or offshore. We must continue to fight against the burdens of over-regulation on small business and hold the PCAOB accountable to the public."

He also stated that he is currently discussing all legal options with his firm's attorneys.