May 18 (Bloomberg) -- The U.S. Supreme Court agreed to consider a constitutional challenge to the Public Company Accounting Oversight Board, the body created by the Sarbanes- Oxley Act to serve as the auditing industry’s watchdog.

The justices today said they will hear arguments that the 2002 law violates the constitutional provision giving the president power to appoint and supervise executive-branch officials.

“The board constitutes a wholly unprecedented effort by Congress to eliminate the president’s control of executive officers to the maximum possible extent, short of assigning the appointment and removal power to itself,” argued an appeal by Beckstead and Watts LLP, a Las Vegas-area accounting firm, and the Free Enterprise Fund, which advocates smaller government.

The decision to hear the case casts doubt on the future of a 6-year-old board that has established a series of auditing standards, inspected hundreds of public accounting firms and taken enforcement action against a dozen firms. The board was set up in response to accounting frauds at Enron Corp. and WorldCom Inc.

“Investors would lose if we lost the PCAOB,” said Charles Mulford, an accounting professor at the Georgia Institute of Technology in Atlanta. “They helped to instill confidence in audits that after Enron was sorely lacking. The peer review process that was in place before Sarbanes-Oxley had broken down and was ineffective.”

The Next Term

The justices will hear arguments during their 2009-10 term, which starts in October.

The U.S. Court of Appeals for the D.C. Circuit in Washington, voting 2-1, concluded that the Securities and Exchange Commission’s “comprehensive” oversight of the board satisfied the requirements of the Constitution’s appointments clause. The provision says that Congress can authorize people other than the president to appoint “inferior officers.”

The full D.C. Circuit in November voted 5-4 not to reconsider the panel’s ruling.

The Obama administration and the board filed briefs urging the Supreme Court not to hear the case.

“The board members are ‘inferior’ officers, as they are in every respect subordinate to the SEC,” argued U.S. Solicitor General Elena Kagan, the administration’s top Supreme Court lawyer.

Non-Profit Corporation

The board is a non-profit corporation funded by fees from public companies. The SEC must approve both the board’s budget - - $157.6 million for 2009 -- and any rules or auditing standards the panel issues. The SEC also appoints the board’s five members and can remove or censure them for “good cause.”

“We remain confident that the PCAOB’s structure is constitutional and look forward to our opportunity to demonstrate that in the Supreme Court,” board spokeswoman Colleen Brennan said in an e-mailed statement.

Some investor advocates, including the AFL-CIO, have criticized the board for not being aggressive enough in fighting fraud.

The case is Free Enterprise Fund v. Public Company Accounting Oversight Board, 08-861.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net; Ian Katz in New York at ikatz2@bloomberg.net.

Last Updated: May 18, 2009 11:24 EDT