Is the Sarbanes-Oxley Act going to survive? 2762
lekatis last edited by
I have received several emails these days, and there are many that worry about the future of the Sarbanes-Oxley Act and ask almost the same questions:
Is the Sarbanes-Oxley Act going to survive?
What about the constitutional challenge to the Sarbanes-Oxley Act in the court?
Is it correct that the Act (that permits members of the Public Company Accounting Oversight Board (PCAOB) to be selected by the SEC) violates the separation-of-powers doctrine?
Well, there is nothing to worry about.
It is interesting to understand better what happens.
Do you remember the day Senator Paul Sarbanes (D-Md) introduced the Bill 2673 (that would become the Sarbanes Oxley Act) to the Senate?
It was June 25, 2002.
Do you remember what had happened the same day?
WorldCom publicly announced that it had overstated earnings during the past five quarters by USD3.8 billion.
Within three weeks, Sarbanes’s bill was passed in the Senate, and two weeks thereafter, the bill had been reconciled with a very similar House Bill that passed as the Sarbanes-Oxley Act of 2002.
This was too quick. Investor confidence had to be restored as soon as possible. And it worked.
What about the constitutionality of the Act?
Is the Public Company Accounting Oversight Board violating the Appointments Clause of the United States Constitution or the separation of powers doctrine?
At least, this is what is described in the complaint in the Unites States District Court for the District of Columbia, alleging that the Sarbanes-Oxley Act of 2002 violated the United States Constitution.
Since February 7, 2006 the Free Enterprise Fund of Washington D.C., a nonprofit organization, along with Beckstead and Watts, LLP, a Nevada accounting firm, filed the above complaint, and SOX professionals started to discuss what could it mean.
A. The complaint alleged that the Board violated the Appointments Clause. What does it mean?
The Appointments Clause is Article II, Section 2, Clause 2 of the United States Constitution.
It empowers the President of the United States to appoint certain public officials with the ‘advice and consent’ of the U.S. Senate. This clause also allows lower-level officials to be appointed without the advice and consent process.
The full text of the clause:
‘The President shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments’.
The complaint (of the Free Enterprise Fund) stated that members of the PCAOB are PRINCIPAL officers whose appointments must be made by the President by and with the advice and consent of the Senate.
Alternatively, if the members of the Board are inferior officers, according to the complaint, the appointment of PCAOB members by the SEC violated the Appointments Clause because the SEC is not a department within the meaning of the Clause.
B. The complaint alleged that the PCAOB violated the separation of powers doctrine. What does it mean?
Separation of powers is the political doctrine under which the executive, legislative and judicial branches of government are kept distinct, to prevent abuse of power.
The model was first developed in ancient Greece and came into widespread use by the Roman Republic as part of the uncodified Constitution of the Roman Republic.
Ultimate sovereignty (power) in the United States resides with the people. The Framers of the Constitution at the Constitutional Convention of 1787, feared the concentration of too much power in any one person or governmental agency. In an attempt to prevent such an accumulation of power, the Framers wrote a Constitution with a system of checks and balances.
Under this system, power is divided among different branches of government. This system is based upon the idea that each branch will be protective of its own power and, thus, prevent, intrusions upon it from other branchesthereby preventing any one branch of government from becoming too powerful.
Three branches are created in the U.S. Constitution.
The Legislative, composed of the House and Senate, is set up in Article 1.
The Executive, composed of the President, Vice-President, and the Departments, is set up in Article 2.
The Judicial, composed of the federal courts and the Supreme Court, is set up in Article 3. Each of these branches has certain powers, and each of these powers is limited (or checked) by another branch.
The complaint (of the Free Enterprise Fund) alleged that the Board’s (PCAOB) exercise of wideranging, core executive power, immune from Presidential oversight, impermissibly impedes and undermines the President’s ability to perform his constitutional duties and prerogatives.
So, what has happened?
On March 21, 2007, the US District Court for the District of Columbia granted summary judgment in favor of the defendants.
Judge James Robertson said that the Appointments Clause was not violated because the PCAOB members are inferior officers
Judge Robertson dismissed the separation of powers argument also. He said that the Supreme Court has never held that the Constitution requires the President to maintain direct removal power over inferior officers
The United States Court of Appeals for the District of Columbia issued its opinion on August 22, 2008. The court affirmed Judge Robertson’s ruling.
So, what is next?
The Supreme Court is scheduled to hear oral arguments in ‘Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Board and the United States of America’ on December 7.
According to some that dislike the Sarbanes Oxley Act, if the Supreme Court will find the PCAOB unconstitutional, the whole
Sarbanes Oxley Act could end up being viewed as unconstitutional by lower courts. Congress would then have to revisit the law, rather than crafting a fix specifically for the PCAOB.
This is very very unlikely to happen.
As Judge Kavanaugh points out, the constitutional flaws here could be easily and quickly corrected.
He suggests that Congress could simply amend the statute to require that the President appoint the Board members with the advice and consent of the Senate.
Alternatively, he suggests that Congress could simply make the Board part of the SEC directed, supervised, and removable at will by the Commission
Even if the challenge is successful, it WILL NOT be the end of the PCAOB or the Sarbanes Oxley Act.