Sarbanes-Oxley and Corporate Governance, Law , Assignment help

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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. . . .

It
is so ordered.

case_15.3_free_enterprise_fund_v._public_company_accounting_oversight_board___for_merge.doc

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