Sarbanes-Oxley and Corporate Governance Paper
Use case 15.3
700- to 1,050-words in which you answer the following:
- If auditing of financial statements is required for the protection of public investors, should not all PCAOB members be taken from the investment community that uses audited financial statements? Why or why not?
- How does the decision in this case impact the validity of the Board and other provisions of the Sarbanes-Oxley Act?
In APA format
Cite at least 3 peer-reviewed sources.
Case 15.3
FREE ENTERPRISE FUND v. PUBLIC COMPANY
ACCOUNTING OVERSIGHT BOARD
130 S. Ct. 3138 (2010)
As a part of the Sarbanes-Oxley Act, Congress created
the Public Company Accounting Oversight Board
(PCAOB or Board). This Board consists of five members
who are appointed by the Securities and Exchange
Commissioners. Board members serve 5-year, staggered
terms and are not considered Government officers
or employers. This allows the recruitment from
the private sector since the Board members’ salaries
are not subject to governmental limitations. These
members can be removed by the SEC Commissioners
only “for good cause” if the Board member:
“(A) has willfully violated any provision of the
Act, the rules of the Board, or the securities laws; (B)
has willfully abused the authority of that member; or
(C) without reasonable justification or excuse, has failed
to enforce compliance with any such provision or rule,
or any professional standard by any registered public
accounting firm or any associated person thereof.”
This arrangement concerning the appointment and
potential removal of Board members makes the PCAOB
a Government-created, Government-appointed entity
with expansive powers to govern an entire industry
(public accounting firms). It further makes the Board
members insulated from the direct supervision of the
SEC Commissioners.
Following the Board’s release of a negative report
about Beckstead and Watts, LLP, a public accounting
firm, this lawsuit was filed by that firm and The
Free Enterprise Fund challenging the constitutionality
of the Sarbanes-Oxley Act at least as far as the
creation and operation of the PCAOB. The basis of
this challenge is the Board members are not subject to
the appointed powers of the President of the United
States. The United States Government joined the suit
to defend the Sarbanes-Oxley Act and the PCAOB.
The District Judge granted summary judgment in
favor of the United States, and the D.C. Circuit Court
of Appeals affirmed. Certiorari was granted to review
the constitutional issue.
ROBERTS, C.J.: . . . We hold that the dual for-cause
limitations on the removal of Board members contravene
the Constitution’s separation of powers.
The Constitution provides that “[t]he executive
Power shall be vested in a President of the United
States of America.” Art. II, §1, cl. 1. As Madison stated
on the floor of the First Congress, “if any power
whatsoever is in its nature Executive, it is the power
of appointing, overseeing, and controlling those who
execute the laws.”
The removal of executive officers was discussed
extensively in Congress when the first executive
departments were created. The view that “prevailed, as
most consonant to the text of the Constitution” and
“to the requisite responsibility and harmony in the
Executive Department,” was that the executive power
included a power to oversee executive officers through
removal; because that traditional executive power
was not “expressly taken away, it remained with the
President.” . . .
The landmark case of Myers v. United States
reaffirmed the principle that Article II confers on the
President “the general administrative control of those
executing the laws.” It is his responsibility to take care
that the laws be faithfully executed. The buck stops
with the President, in Harry Truman’s famous phrase.
As we explained in Myers, the President therefore
must have some “power of removing those for whom
he cannot continue to be responsible.”
Nearly a decade later in Humphrey’s Executor,
this Court held that Myers did not prevent Congress
from conferring good-cause tenure on the principal
officers of certain independent agencies. That case
concerned the members of the Federal Trade Commission,
who held 7-year terms and could not be removed
by the President except for “inefficiency, neglect of
duty, or malfeasance in office.” The Court distinguished
Myers on the ground that Myers concerned
“an officer [who] is merely one of the units in the
executive department and, hence, inherently subject to
the exclusive and illimitable power of removal by the
Chief Executive, whose subordinate and aid he is.” By
contrast, the Court characterized the FTC as “quasilegislative
and quasi-judicial” rather than “purely
executive,” and held that Congress could require it “to
act . . . independently of executive control.” Because
“one who holds his office only during the pleasure
of another, cannot be depended upon to maintain an
attitude of independence against the latter’s will,” the
Court held that Congress had power to “fix the period
during which [the Commissioners] shall continue in
office, and to forbid their removal except for cause in
the meantime.”
Humphrey’s Executor did not address the
removal of inferior officers, whose appointment Congress
may vest in heads of departments. If Congress
does so, it is ordinarily the department head, rather
than the President, who enjoys the power of removal.
This Court has upheld for-cause limitations on that
power as well. . . .
We have previously upheld limited restrictions
on the President’s removal power. In those cases,
however, only one level of protected tenure separated
the President from an officer exercising executive
power. It was the President—or a subordinate he
could remove at will—who decided whether the officer’s
conduct merited removal under the good-cause
standard. The Act before us does something quite
different. It not only protects Board members from
removal except for good cause, but withdraws from
the President any decision on whether that good cause
exists. That decision is vested instead in other tenured
officers—the Commissioners—none of whom is subject
to the President’s direct control. The result is a
Board that is not accountable to the President, and a
President who is not responsible for the Board. The
added layer of tenure protection makes a difference.
Without a layer of insulation between the Commission
and the Board, the Commission could remove a
Board member at any time, and therefore would be
fully responsible for what the Board does. The President
could then hold the Commission to account for
its supervision of the Board, to the same extent that
he may hold the Commission to account for everything
else it does. A second level of tenure protection
changes the nature of the President’s review. Now the
Commission cannot remove a Board member at will.
The President therefore cannot hold the Commission
fully accountable for the Board’s conduct, to the same
extent that he may hold the Commission accountable
for everything else that it does. The Commissioners are
not responsible for the Board’s actions. They are only
responsible for their own determination of whether the
Act’s rigorous good-cause standard is met. And even if
the President disagrees with their determination, he is
powerless to intervene—unless that determination is
so unreasonable as to constitute inefficiency, neglect of
duty, or malfeasance in office.
This novel structure does not merely add to the
Board’s independence, but transforms it. Neither the
President, nor anyone directly responsible to him, nor
even an officer whose conduct he may review only for
good cause, has full control over the Board. The President
is stripped of the power our precedents have preserved,
and his ability to execute the laws—by holding
his subordinates accountable for their conduct—is
impaired.
That arrangement is contrary to Article II’s vesting
of the executive power in the President. Without the
ability to oversee the Board, or to attribute the Board’s
failings to those whom he can oversee, the President
is no longer the judge of the Board’s conduct. He is
not the one who decides whether Board members are
abusing their offices or neglecting their duties. He can
neither ensure that the laws are faithfully executed,
nor be held responsible for a Board member’s breach
of faith. This violates the basic principle that the President
cannot delegate ultimate responsibility or the
active obligation to supervise that goes with it, because
Article II makes a single President responsible for the
actions of the Executive Branch.
Indeed, if allowed to stand, this dispersion of
responsibility could be multiplied. If Congress can shelter
the bureaucracy behind two layers of good-cause
tenure, why not a third? At oral argument, the Government
was unwilling to concede that even five layers
between the President and the Board would be too
many. The officers of such an agency—safely encased
within a Matryoshka doll of tenure protections—
would be immune from Presidential oversight, even as
they exercised power in the people’s name.
Perhaps an individual President might find advantages
in tying his own hands. But the separation of
powers does not depend on the views of individual
Presidents, nor on whether the encroached-upon
branch approves the encroachment. The President can
always choose to restrain himself in his dealings with
subordinates. He cannot, however, choose to bind his
successors by diminishing their powers, nor can he
escape responsibility for his choices by pretending that
they are not his own.
The diffusion of power carries with it a diffusion
of accountability. The people do not vote for the
Officers of the United States. They instead look to the
President to guide the assistants or deputies . . . subject
to his superintendence. Without a clear and effective
chain of command, the public cannot determine on
whom the blame or the punishment of a pernicious
measure, or series of pernicious measures ought really
to fall. That is why the Framers sought to ensure that
those who are employed in the execution of the law
will be in their proper situation, and the chain of
dependence be preserved; the lowest officers, the middle
grade, and the highest, will depend, as they ought,
on the President, and the President on the community.
By granting the Board executive power without the
Executive’s oversight, this Act subverts the President’s
ability to ensure that the laws are faithfully executed—
as well as the public’s ability to pass judgment on his
efforts. The Act’s restrictions are incompatible with the
Constitution’s separation of powers. . . .
This case presents an even more serious threat to
executive control than an “ordinary” dual for-cause
standard. Congress enacted an unusually high standard
that must be met before Board members may be
removed. A Board member cannot be removed except
for willful violations of the Act, Board rules, or the
securities laws; willful abuse of authority; or unreasonable
failure to enforce compliance—as determined
in a formal Commission order, rendered on the record
and after notice and an opportunity for a hearing.
The Act does not even give the Commission power to
fire Board members for violations of other laws that
do not relate to the Act, the securities laws, or the
Board’s authority. The President might have less than
full confidence in, say, a Board member who cheats on
his taxes; but that discovery is not listed among the
grounds for removal. . . .
The rigorous standard that must be met before a
Board member may be removed was drawn from statutes
concerning private organizations like the New
York Stock Exchange. While we need not decide the
question here, a removal standard appropriate for
limiting Government control over private bodies may
be inappropriate for officers wielding the executive
power of the United States. . . .
Petitioners’ complaint argued that the Board’s
“freedom from Presidential oversight and control”
rendered it “and all power and authority exercised by
it” in violation of Constitution. We reject such a broad
holding. Instead, we agree with the Government that
the unconstitutional tenure provisions are severable
from the remainder of the statute.
Generally speaking, when confronting a constitutional
flaw in a statute, we try to limit the solution to the
problem, severing any problematic portions while leaving
the remainder intact. . . . Concluding that the removal
restrictions are invalid leaves the Board removable by the
Commission at will, and leaves the President separated
from Board members by only a single level of good-cause
tenure. The Commission is then fully responsible for the
Board’s actions, which are no less subject than the Commission’s
own functions to Presidential oversight.
The Sarbanes-Oxley Act remains fully operative
as a law with these tenure restrictions excised.
We therefore must sustain its remaining provisions
“[u]nless it is evident that the Legislature would not
have enacted those provisions . . . independently of that
which is [invalid].” Though this inquiry can sometimes
be elusive, the answer here seems clear: The remaining
provisions are not incapable of functioning independently,
and nothing in the statute’s text or historical
context makes it evident that Congress, faced with the
limitations imposed by the Constitution, would have
preferred no Board at all to a Board whose members are
removable at will.
It is true that the language providing for goodcause
removal is only one of a number of statutory provisions
that, working together, produce a constitutional
violation. In theory, perhaps, the Court might bluepencil
a sufficient number of the Board’s responsibilities
so that its members would no longer be “Officers
of the United States.” Or we could restrict the Board’s
enforcement powers, so that it would be a purely recommendatory
panel. Or the Board members could in
future be made removable by the President, for good
cause or at will. But such editorial freedom—far more
extensive than our holding today—belongs to the Legislature,
not the Judiciary. Congress of course remains
free to pursue any of these options going forward. . . .
case_15-3_free_enterprise_fund_v-_public_company_accounting_oversight_board___for_merge
…………………….Answer Preview…………………
The Public Company Accounting Oversight Board is an important body that was formed under the Sarbanes- Oxley Act. This Act was put in place by the congress with the aim of protecting the Americans from cases of fraud which were common (Persellin, 2008). Accounting errors were experienced in the public companies and this led to huge losses to the investing community. Many people lacked trust in these corporations and two Congress men came up with the idea of this Act to regulate these corporations. The government regulates the public corporations through this Act.
Under this Act there is a board known as the Public Company Accounting Oversight Board (PCAOB). This board was formed with the purpose of auditing all public companies to make sure that the investors were…..
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