Posted by Sasha Volokh:
The new Sarbanes-Oxley case:
http://volokh.com/archives/archive_2009_05_17-2009_05_23.shtml#1242700496
Since the Supreme Court has granted cert in Free Enterprise Fund v.
PCAOB (see [1]here), I thought I would share a summary of the facts of
the case, which I prepared as a study guide for my Administrative Law
class at University of Houston:
In 2002, following a series of accounting scandals that exposed
weaknesses in the reporting requirements for publicly held
companies, Congress passed the Sarbanes-Oxley Act of 2002 ("the
Act" or "SOX"). Title I of the Act established the Public Company
Accounting Oversight Board ("the Board" or "PCAOB") as a new entity
to oversee the audits of public companies. The Board's purpose is
"to protect the interests of investors and further the public
interest in the preparation of informative, accurate, and
independent audit reports for companies the securities of which are
sold to, and held by and for, public investors." In particular, the
Act provides that:
The Board shall, by rule, establish, including, to the extent it
determines appropriate, through adoption of standards proposed by 1
or more professional groups of accountants [which it shall
designate] or advisory groups [which it shall convene], and amend
or otherwise modify or alter, such auditing and related attestation
standards, such quality control standards, and such ethics
standards to be used by registered public accounting firms in the
preparation and issuance of audit reports, as required by this Act
or the rules of the Commission, or as may be necessary or
appropriate in the public interest or for the protection of
investors.
The five members of the PCAOB are appointed by the Securities and
Exchange Commission ("the Commission" or "SEC") after consultation
with the Chairman of the Board of Governors of the Federal Reserve
and the Secretary of the Treasury. Appointment is by majority vote
of the five SEC Commissioners. Two PCAOB members must be or have
been certified public accountants. After its members are appointed
by the SEC, the Board assumes its responsibilities only upon the
Commission's determination that the Board has the capacity to carry
out the Act's requirements (i.e., that it is properly organized and
has appropriate rules and procedures in place). The Commission
alone determines whether the Board may "sue and be sued" in any
court.
(As for the Commissioners themselves, all five Commissioners are
appointed by the President with Senate confirmation. SEC
Commissioners can be removed by the President for cause (i.e., for
inefficiency, neglect of duty, or malfeasance). The SEC Chairman is
selected from among the Commissioners by the President, and serves
as Chairman at the President's pleasure. The Chairman often
dominates commission policymaking, controls the administrative side
of commission business, selects most staff, and sets budgetary
policy.)
A member of the Board may be censured or removed from office "for
good cause shown" upon a finding by the Commission, after notice
and opportunity for a hearing, that the member willfully violated
the Act or abused authority, or failed to enforce compliance with a
rule or standard without reasonable justification. The Commission
is further empowered, by rule, to relieve the Board, consistent
with the public interest, of any enforcement authority whatsoever,
as well as, by order, to censure the Board and, after notice and
opportunity for a hearing, to "impose limitations upon the
activities, functions, and operations of the Board" upon finding
that the Board has failed to abide by its statutory duties.
"No rule of the Board shall become effective without prior approval
of the Commission." To approve a rule, the Commission generally
must conduct its own notice-and-comment proceedings. The Commission
"shall approve a proposed rule, if it finds that the rule is
consistent with the requirements of [the] Act and the securities
laws, or is necessary or appropriate in the public interest or for
the protection of investors." The Commission is empowered to
"abrogate, add to, and delete from" the Board's rules "to assure
the fair administration of the [Board], conform the rules
promulgated by that Board to the requirements of [the Act], or
otherwise further purposes of [the] Act, the securities laws, and
the rules and regulations thereunder applicable to [the] Board."
The Commission itself is also empowered to promulgate rules in
furtherance of the Act.
The Act requires auditors of public companies to register with the
PCAOB by submitting applications to the PCAOB, filing periodic
reports with the PCAOB, and paying fees to the PCAOB. The SEC may
review the PCAOB's accounting support fee rules and denials of
regulation applications. The PCAOB may inspect accounting firms and
release interim reports detailing any deficiencies in advance of
its final conclusions.
When the PCAOB investigates a potential securities law violation,
the Board must both inform the Commission and coordinate its
activities with the Commission. If a company violates PCAOB rules
governing the auditing of public companies, it will be subject to
disciplinary actions and sanctions by the PCAOB. Any violation of
PCAOB rules "shall be treated . . . as a violation of the
Securities Exchange Act of 1934." If the PCAOB determines, after
investigation, that an accounting firm has committed a violation,
it has the power to impose an appropriate sanction.
All Board adjudications are subject to the Commission's de novo
review, upon an immediate stay when an application for review is
filed or sua sponte by the Commission. Sanctions imposed by the
PCAOB are generally stayed pending Commission review of the
inspection report. The Commission is empowered to "enhance, modify,
cancel, reduce, or require the remission of a sanction imposed by
the Board." The Commission may alter or cancel a sanction imposed
by the PCAOB if, "having due regard for the public interest and the
protection of investors," the SEC finds that the sanction is "not
necessary or appropriate in furtherance of this Act or the
securities laws" or is "excessive, oppressive, inadequate, or
otherwise not appropriate." Final Commission decisions are
reviewable by the Court of Appeals.
Acme Accountants, an accounting firm registered with the Board and
subject to an ongoing formal investigation, seeks declaratory and
injunctive relief prohibiting the Board from proceeding, arguing
that the structure of the Board violates various separation of
powers doctrines. What arguments could Acme make, and how would
those issues be resolved?
References
1. http://volokh.com/archives/archive_2009_05_17-2009_05_23.shtml#1242672028
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