The U.S. Supreme Court gave its ruling for Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U. S. 477 in 2010. Free Enterprise Fund filed the case against PCOAB based on Title 1 of the SOX that limits the role of the President for appointment and removal of the board members. It is considered to be violating the Appointment Clause.
The Public Company Accounting Oversight Board (PCAOB) is a nonprofit organization that was originated by an Act, named, Sarbanes-Oxley Act of 2002. It consists of five members, including Chairman of the Board, and Security Exchange Commission (SEC) appoints members of the board. SEC selects the members of the board by having a discussion with the Board of Governors. The organization was formed to supervise the audited financial statements of a public company. The significant task of the organization is to facilitate investors by overseeing the audit reports of the company. It analyzes the audit reports in the interest of the public and assures the companies prepare financial reports independently and accurately. The PCAOB also manages the audits of brokers and dealers by ensuring that compliance reports are filed according to the requirements of federal security laws (Welytok, 2006).
The SEC should choose PCAOB members of the investment community who are expertise in analyzing the financial reports of a public company. The main task of PCAOB is to oversee the audit reports prepared by public companies and ensure that it is accurate. It is also responsible for restoring the confidence of investors regarding the validity of financial statements. Investors always review the audit reports of public companies for investment decision making so it is preferable that they should have an opportunity to do such task. However, if a person who did not work for a company is assigned to fulfill the task, it would not be possible for him to fulfill the obligation imposed on him (Ambler, Massaro, Stewart, & Acre, 2005).
A person appointed to become a member of the PCAOB should have at least one time worked under the supervision of the PCAOB board. An experienced, skilled and qualified person is required to accomplish the work of reviewing financial reports for a public company. All public companies are entitled to fulfill the directives and requirements of the PCAOB. An unknown or inexperienced person cannot fulfill the requirement of the SEC that is essential for reviewing the audited financial reports. Furthermore, a person cannot provide factual and realistic rationale on the reports of a public unless he is not interacting with the SEC. A member should ensure the performance of all four primary functions of the board that are:
• Registration
• Inspection
• Enforcement
• Standard Setting
All the members should be appointed from the community as they will ensure that a public company fulfills the requirements of the SEC. They work in the public interest and review the audited financial statements of a public company from an investor’s point of view. The members of PCAOB has specialization in overseeing the financial statements and reports of a company and provide a rationale for the investors in decision making for investment (Ambler, Massaro, Stewart, & Acre, 2005).
The court decision for the case resolves the confusion of validity of PCAOB. The validity of PCAOB was endangered as it operated under the cloud of a lawsuit. Free enterprise plays a vital role in eliminating the doubts and confusion. PCAOB stated the press release after the decision of the court that was neither favorable nor unfavorable for both the parties. PCAOB announced that all operations of the board will continue in the same direction as they were before the decision. It means that the board will perform its primary functions including registration, inspection, standard-setting activities, and enforcement (Breger & Edles, 2015).
The lengthy litigation by the court distracted the board, but the result was in favor of the PCAOB regulated firms. They can now expect a reinvigorated board that will fulfill all of its prior obligations in the same manner. All the actions of the board continued, and the authorities acquired by the members remained unchanged after the court decision. The decision impliedly strengthened the workings of the board, and they enjoyed a better position regarding the validity of the board (Breger & Edles, 2015).
The court decision struck down the provisions of the Sarbanes-Oxley Act that restricts the authorities of SEC to remove the members of PCAOB in good faith. The decision provided by the fact that the removal provisions of the act resulted in the violation of the constitution that is the separation of powers principles. It further explains that appointment of members of PCAOB is made by the SEC, so that they should also decide their removal. The SEC is allowed legally to remove members of PCAOB from their office at will. The decision presented by avoiding contradiction with the constitution. The provision of the constitution would have violated if the decision was opposed to it (Breger & Edles, 2015).
It could be concluded that the decision was important for PCAOB and Free Enterprise Fund as it removed all the confusions regarding the appointment, workings, and removal of PCAOB members. The questions regarding the validity of the board were answered by the decisions of the court. It resulted in increasing the confidence of investors towards PCAOB. The issue of removal of members of PCAOB of the SEC was also resolved that clarified that decision was made under the provisions of constitutions.
References
Ambler, D. E., Massaro, L., Stewart, K. L., & Acre, J. W. (2005). Sarbanes-Oxley Act: Planning & Compliance. alphen aan den rijn: Aspen Publishers.
Breger, M. J., & Edles, G. J. (2015). Independent Agencies in the United States: Law, Structure, and Politics. Oxford: Oxford University Press.
Welytok, J. G. (2006). Sarbanes-Oxley For Dummies. Hoboken: John Wiley & Sons.
