By Marcy Gordon
Associated Press

WASHINGTON - A federal appeals court on Friday denied a constitutional challenge to a 2002 anti-fraud law that created a board to oversee the accounting industry after a wave of business scandals.

An attorney for the plaintiffs, a conservative pro-business group, said it planned to appeal the 2-1 ruling by a panel of the U.S. Court of Appeals for the District of Columbia Circuit, either to the full appeals court or directly to the Supreme Court.

The panel's ruling rejected the argument by the Free Enterprise Fund that the industry-oversight board established by the Sarbanes-Oxley law violates the Constitution's mandated separation of powers among the three federal branches.

The group has argued that the Public Company Accounting Oversight Board - endowed with subpoena power and the authority to discipline accountants - breaches the separation-of-powers requirement because its five members aren't appointed by the president, cannot be removed by him, and Congress does not control the board's budget.

The appeals court's decision upheld a lower court's ruling from March 2007 that dismissed the Free Enterprise Fund's lawsuit, filed in February 2006.

The PCAOB is funded by fees paid by public companies. Its members are appointed by the Securities and Exchange Commission, an independent federal agency.

The Sarbanes-Oxley law "does not encroach upon" the constitutional requirement because the board members "are subject to direction and supercvision of the (SEC) and thus are inferior officers not required to be appointed by the president," said the ruling by Hon. Judith Rogers and Hon. Janice Rogers Brown.

Hon. Brett Kavanaugh dissented, writing that it was "the most important separation-of-powers case regarding the president's appointment and removal powers to reach the courts in the last 20 years."

The PCAOB's structure "unconstitutionally restricts the president's appointment and removal powers," Kavanaugh wrote.

SEC Chairman Christopher Cox called the ruling "welcome news for the (SEC), investors and U.S. capital markets." The PCAOB said it was "gratified" by the decision.

Christian Vergonis, an attorney for the Free Enterprise Fund, said the group was disappointed with the decision and intends to appeal either to the full appeals court or directly to the Supreme Court.

Besides creating the PCAOB, the 2002 law required greater financial disclosures and increased the criminal penalties for securities fraud after the wave of business scandals that engulfed Enron Corp., WorldCom Inc., Tyco International Ltd. and other companies. The law could be invalidated if any of its sections are found to be unconstitutional. Opponents want it sent back to Congress for a revision.

Business interests, especially smaller public companies, have complained about the costs of complying with a key part of the Sarbanes-Oxley law: the requirement to file reports on the strength of their internal financial controls and fix any problems.

Beckstead & Watts LLP, a small Nevada accounting firm, joined the Free Enterprise Fund as a plaintiff in the case. The PCAOB inspected the firm in 2004 for compliance with Sarbanes-Oxley and mounted a disciplinary investigation based on that review, which identified eight audits that said the firm didn't obtain sufficient evidence to support its opinion on its clients' financial statements.