Sarbanes-Oxley and Corporate Governance, Law , Assignment help

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

FREEENTERPRISE FUND v. PUBLIC COMPANY

ACCOUNTINGOVERSIGHT BOARD

130S. Ct. 3138 (2010)

Asa part of the Sarbanes-Oxley Act, Congress created

thePublic Company Accounting Oversight Board

(PCAOBor Board). This Board consists of five members

whoare appointed by the Securities and Exchange

Commissioners.Board members serve 5-year, staggered

termsand are not considered Government officers

oremployers. This allows the recruitment from

theprivate sector since the Board members’ salaries

arenot subject to governmental limitations. These

memberscan 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)

haswillfully abused the authority of that member; or

(C)without reasonable justification or excuse, has failed

toenforce compliance with any such provision or rule,

orany professional standard by any registered public

accountingfirm or any associated person thereof.”

Thisarrangement concerning the appointment and

potentialremoval of Board members makes the PCAOB

aGovernment-created, Government-appointed entity

withexpansive powers to govern an entire industry

(publicaccounting firms). It further makes the Board

membersinsulated from the direct supervision of the

SECCommissioners.

Followingthe Board’s release of a negative report

aboutBeckstead and Watts, LLP, a public accounting

firm,this lawsuit was filed by that firm and The

FreeEnterprise Fund challenging the constitutionality

ofthe Sarbanes-Oxley Act at least as far as the

creationand operation of the PCAOB. The basis of

thischallenge is the Board members are not subject to

theappointed powers of the President of the United

States.The United States Government joined the suit

todefend the Sarbanes-Oxley Act and the PCAOB.

TheDistrict Judge granted summary judgment in

favorof the United States, and the D.C. Circuit Court

ofAppeals affirmed. Certiorari was granted to review

theconstitutional issue.

ROBERTS,C.J.: .. . We hold that the dual for-cause

limitationson the removal of Board members contravene

theConstitution’s separation of powers.

TheConstitution provides that “[t]he executive

Powershall be vested in a President of the United

Statesof America.” Art. II, §1,cl. 1. As Madison stated

onthe floor of the First Congress, “if any power

whatsoeveris in its nature Executive, it is the power

ofappointing, overseeing, and controlling those who

executethe laws.”

Theremoval of executive officers was discussed

extensivelyin Congress when the first executive

departmentswere created. The view that “prevailed, as

mostconsonant to the text of the Constitution” and

“tothe requisite responsibility and harmony in the

ExecutiveDepartment,” was that the executive power

includeda power to oversee executive officers through

removal;because that traditional executive power

wasnot “expressly taken away, it remained with the

President.”. . .

Thelandmark case of Myersv.UnitedStates

reaffirmedthe principle that Article II confers on the

President“the general administrative control of those

executingthe laws.” It is hisresponsibilityto take care

thatthe laws be faithfully executed. The buck stops

withthe President, in Harry Truman’s famous phrase.

Aswe explained in Myers,thePresident therefore

musthave some “power of removing those for whom

hecannot continue to be responsible.”

Nearlya decade later in Humphrey’sExecutor,

thisCourt held that Myersdidnot prevent Congress

fromconferring good-cause tenure on the principal

officersof certain independent agencies. That case

concernedthe members of the Federal Trade Commission,

whoheld 7-year terms and could not be removed

bythe President except for “inefficiency, neglect of

duty,or malfeasance in office.” The Court distinguished

Myersonthe ground that Myersconcerned

“anofficer [who] is merely one of the units in the

executivedepartment and, hence, inherently subject to

theexclusive and illimitable power of removal by the

ChiefExecutive, whose subordinate and aid he is.” By

contrast,the Court characterized the FTC as “quasilegislative

andquasi-judicial” rather than “purely

executive,”and held that Congress could require it “to

act. . . independently of executive control.” Because

“onewho holds his office only during the pleasure

ofanother, cannot be depended upon to maintain an

attitudeof independence against the latter’s will,” the

Courtheld that Congress had power to “fix the period

duringwhich [the Commissioners] shall continue in

office,and to forbid their removal except for cause in

themeantime.”

Humphrey’sExecutor didnot address the

removalof inferior officers, whose appointment Congress

mayvest in heads of departments. If Congress

doesso, it is ordinarily the department head, rather

thanthe President, who enjoys the power of removal.

ThisCourt has upheld for-cause limitations on that

poweras well. . . .

Wehave previously upheld limited restrictions

onthe President’s removal power. In those cases,

however,only one level of protected tenure separated

thePresident from an officer exercising executive

power.It was the President—or a subordinate he

couldremove at will—who decided whether the officer’s

conductmerited removal under the good-cause

standard.The Act before us does something quite

different.It not only protects Board members from

removalexcept for good cause, but withdraws from

thePresident any decision on whether that good cause

exists.That decision is vested instead in other tenured

officers—theCommissioners—none of whom is subject

tothe President’s direct control. The result is a

Boardthat is not accountable to the President, and a

Presidentwho is not responsible for the Board. The

addedlayer of tenure protection makes a difference.

Withouta layer of insulation between the Commission

andthe Board, the Commission could remove a

Boardmember at any time, and therefore would be

fullyresponsible for what the Board does. The President

couldthen hold the Commission to account for

itssupervision of the Board, to the same extent that

hemay hold the Commission to account for everything

elseit does. A second level of tenure protection

changesthe nature of the President’s review. Now the

Commissioncannot remove a Board member at will.

ThePresident therefore cannot hold the Commission

fullyaccountable for the Board’s conduct, to the same

extentthat he may hold the Commission accountable

foreverything else that it does. The Commissioners are

notresponsible for the Board’s actions. They are only

responsiblefor their own determination of whether the

Act’srigorous good-cause standard is met. And even if

thePresident disagrees with their determination, he is

powerlessto intervene—unless that determination is

sounreasonable as to constitute inefficiency, neglect of

duty,or malfeasance in office.

Thisnovel structure does not merely add to the

Board’sindependence, but transforms it. Neither the

President,nor anyone directly responsible to him, nor

evenan officer whose conduct he may review only for

goodcause, has full control over the Board. The President

isstripped of the power our precedents have preserved,

andhis ability to execute the laws—by holding

hissubordinates accountable for their conduct—is

impaired.

Thatarrangement is contrary to Article II’s vesting

ofthe executive power in the President. Without the

abilityto oversee the Board, or to attribute the Board’s

failingsto those whom he canoversee,the President

isno longer the judge of the Board’s conduct. He is

notthe one who decides whether Board members are

abusingtheir offices or neglecting their duties. He can

neitherensure that the laws are faithfully executed,

norbe held responsible for a Board member’s breach

offaith. This violates the basic principle that the President

cannotdelegate ultimate responsibility or the

activeobligation to supervise that goes with it, because

ArticleII makes a single President responsible for the

actionsof the Executive Branch.

Indeed,if allowed to stand, this dispersion of

responsibilitycould be multiplied. If Congress can shelter

thebureaucracy behind two layers of good-cause

tenure,why not a third? At oral argument, the Government

wasunwilling to concede that even fivelayers

betweenthe President and the Board would be too

many.The officers of such an agency—safely encased

withina Matryoshka doll of tenure protections—

wouldbe immune from Presidential oversight, even as

theyexercised power in the people’s name.

Perhapsan individual President might find advantages

intying his own hands. But the separation of

powersdoes not depend on the views of individual

Presidents,nor on whether the encroached-upon

branchapproves the encroachment. The President can

alwayschoose to restrain himself in his dealings with

subordinates.He cannot, however, choose to bind his

successorsby diminishing their powers, nor can he

escaperesponsibility for his choices by pretending that

theyare not his own.

Thediffusion of power carries with it a diffusion

ofaccountability. The people do not vote for the

Officersof the United States. They instead look to the

Presidentto guide the assistants or deputies . . . subject

tohis superintendence. Without a clear and effective

chainof command, the public cannot determine on

whomthe blame or the punishment of a pernicious

measure,or series of pernicious measures ought really

tofall. That is why the Framers sought to ensure that

thosewho are employed in the execution of the law

willbe in their proper situation, and the chain of

dependencebe preserved; the lowest officers, the middle

grade,and the highest, will depend, as they ought,

onthe President, and the President on the community.

Bygranting the Board executive power without the

Executive’soversight, this Act subverts the President’s

abilityto ensure that the laws are faithfully executed—

aswell as the public’s ability to pass judgment on his

efforts.The Act’s restrictions are incompatible with the

Constitution’sseparation of powers. . . .

Thiscase presents an even more serious threat to

executivecontrol than an “ordinary” dual for-cause

standard.Congress enacted an unusually high standard

thatmust be met before Board members may be

removed.A Board member cannot be removed except

forwillful violations of the Act, Board rules, or the

securitieslaws; willful abuse of authority; or unreasonable

failureto enforce compliance—as determined

ina formal Commission order, rendered on the record

andafter notice and an opportunity for a hearing.

TheAct does not even give the Commission power to

fireBoard members for violations of otherlawsthat

donot relate to the Act, the securities laws, or the

Board’sauthority. The President might have less than

fullconfidence in, say, a Board member who cheats on

histaxes; but that discovery is not listed among the

groundsfor removal. . . .

Therigorous standard that must be met before a

Boardmember may be removed was drawn from statutes

concerningprivate organizations like the New

YorkStock Exchange. While we need not decide the

questionhere, a removal standard appropriate for

limitingGovernment control over private bodies may

beinappropriate for officers wielding the executive

powerof the United States. . . .

Petitioners’complaint argued that the Board’s

“freedomfrom Presidential oversight and control”

renderedit “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

theunconstitutional tenure provisions are severable

fromthe remainder of the statute.

Generallyspeaking, when confronting a constitutional

flawin a statute, we try to limit the solution to the

problem,severing any problematic portions while leaving

theremainder intact. . . . Concluding that the removal

restrictionsare invalid leaves the Board removable by the

Commissionat will, and leaves the President separated

fromBoard members by only a single level of good-cause

tenure.The Commission is then fully responsible for the

Board’sactions, which are no less subject than the Commission’s

ownfunctions to Presidential oversight.

TheSarbanes-Oxley Act remains fully operative

asa law with these tenure restrictions excised.

Wetherefore must sustain its remaining provisions

“[u]nlessit is evident that the Legislature would not

haveenacted those provisions . . . independently of that

whichis [invalid].” Though this inquiry can sometimes

beelusive, the answer here seems clear: The remaining

provisionsare not incapable of functioning independently,

andnothing in the statute’s text or historical

contextmakes it evident that Congress, faced with the

limitationsimposed by the Constitution, would have

preferredno Board at all to a Board whose members are

removableat will.

Itis true that the language providing for goodcause

removalis only one of a number of statutory provisions

that,working together, produce a constitutional

violation.In theory, perhaps, the Court might bluepencil

asufficient number of the Board’s responsibilities

sothat its members would no longer be “Officers

ofthe United States.” Or we could restrict the Board’s

enforcementpowers, so that it would be a purely recommendatory

panel.Or the Board members could in

futurebe made removable by the President, for good

causeor at will. But such editorial freedom—far more

extensivethan our holding today—belongs to the Legislature,

notthe Judiciary. Congress of course remains

freeto pursue any of these options going forward. . . .

Itis so ordered.