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
