It's been more than a month since a three-judge panel in the U.S. Court of Appeals for the District of Columbia Circuit heard oral argument in the Free Enterprise Fund's appeal of its case challenging the constitutionality of the Public Company Accounting Oversight Board, and along with it, the Sarbanes-Oxley Act of 2002.  Obviously, there has been no decision as yet, but Bloomberg columnist Jonathan Weil suggests at least one of the judges is leaning in favor of the Free Enterprise Fund and its co-plaintiff, the Las Vegas accounting firm of Beckstead & Watts.

In a piece published Wednesday, Weil says:

...[B]ased on the comments by one of the judges there, Brett Kavanaugh of the U.S. Court of Appeals for the District of Columbia Circuit, it looks like Beckstead already may have one of the votes it needs. That means the business of regulating the nation's accounting firms could be just one vote away from being thrown into disarray. And that would be a very big deal.

The core of plaintiffs' argument against the PCAOB is that its structure violates separation of powers and the Appointments Clause of the U.S. Constitution. They assert that the board is unconstitutional because its members are appointed by the Securities and Exchange Commission rather than being appointed by the president upon the advice and consent of the Senate. In response, PCAOB lawyers say the board is a government agency that's "modeled after self-regulatory organizations common to the securities industry."

The analogy to self-regulating agencies is where Kavanaugh had a problem, it seems. Weil quotes the judge from court transcripts as follows:

If this were upheld, it would be a green light for all sorts of new creations, independent agencies within independent agencies...You don't think this would be a precedent that Congress would use to create new entities within independent agencies that are independent of the independent agency heads? ...As best I can tell, you've provided no examples historically of a similar structure. Zero. Zero. In our history.

So if the FEF and Beckstead & Watts come out ahead and the PCAOB is dismantled, how should the audit industry be supervised? Weil makes a good point in his piece -- an easy fix is not apparent, but the SEC and Congress might need to start thinking about their options.