Welcome to the October 2009 edition of the Sarbanes
Oxley Compliance Professionals Association (SOXCPA)
newsletter
Dear
Members,
I have received several emails
these days, and there are many members of the
association 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 $3.8
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
branches–thereby 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.
Dear member,
Write in your CV, resume, websites etc. that
you are member of the Sarbanes Oxley Compliance Professionals
Association.
Take advantage of
the distance learning and online certification program of our
Association - at a cost that is unheard of.
www.sarbanes-oxley-association.com/Distance_Learning_and_Certification.htm
Best
Regards,
George Lekatis
President of the Sarbanes Oxley
Compliance Professionals Association
General Manager, Compliance
LLC
1200 G Street NW Suite 800, Washington DC 20005, USA
Tel: (202) 449-9750
Email: lekatis@sarbanes-oxley-association.com
Web:
www.sarbanes-oxley-association.com
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