Auditing the PCAOB: A Test to the Accountability of the Uniquely Structured Regulator of Accountants

By Thomason, Michael A. | Vanderbilt Law Review, November 2009 | Go to article overview

Auditing the PCAOB: A Test to the Accountability of the Uniquely Structured Regulator of Accountants


Thomason, Michael A., Vanderbilt Law Review


I. INTRODUCTION

After a slew of highly publicized corporate accounting scandals during the early 2000s at prominent companies - including Enron, WorldCom, Adelphia, and Tyco - public confidence in the integrity of financial reporting by public companies was undoubtedly shaken.1 Several major financial reporting frauds demonstrated serious weaknesses with the then self-regulated accounting profession, including the failure of auditors to detect those companies that were "cooking their books."2 The collapse of several prominent companies not only affected top executives, who often were subjected to civil and criminal charges, but also produced harsh consequences for several other constituencies who relied on the integrity of the accounting firms to detect these discrepancies in financial reporting.3 As one scholar phrased it: "The growing number of accounting and corporate governance scandals had sounded an alarm, which was made all the more deafening by the staggering sums of money lost by shareholders, employees, and retirees of the companies involved."4

Reacting swiftly to the public concern, Congress passed landmark legislation in 2002. Congress designed the Sarbanes-Oxley Act ("SOX") to regulate the conduct of public accounting firms and to revive investors' confidence in the integrity of public companies' financial reporting and disclosures.5 After signing SOX into law, President George W. Bush declared that SOX included some of "the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt."6

SOX represented a radical departure from the previously selfregulated accounting profession. As a central part of SOX, Congress created the Public Company Accounting Oversight Board ("PCAOB") and provided it with extensive authority to ensure that SOX's lofty objectives were met.7 Among the PCAOB's significant powers and responsibilities is the authority to promulgate rules and regulations governing the standards and issuance of audit reports, to conduct inspections and investigations of registered public accounting firms, and to impose monetary sanctions on registered firms for noncompliance with its standards.8

Determined to facilitate public confidence in the integrity of public company accounting oversight, Congress purposefully insulated its new regulatory entity from political influence.9 Central to the PCAOB's independence are the limitations on the appointment and removal of its members. SOX vests the power of appointment and removal of PCAOB members with the commissioners of the Securities and Exchange Commission ("SEC") and limits the commissioners' ability to remove the PCAOB members except "for good cause shown."10 The commissioners, in turn, are removable by the President only for "neglect of duty or malfeasance in office."11 Congress, therefore, created a novel "double for-cause limitation on removal," where the restriction on the PCAOB's removal passes through two levels of control.12 The constitutionality of this structure, in which the President's power to remove an officer of the executive branch is restricted by two "for-cause" limitations, has never been tested in any court prior to a recent challenge to SOX.13

The PCAOB's substantial independence from political interference prompted the Free Enterprise Fund, a non-profit public interest group that promotes economic growth and limited government, to challenge the constitutionality of the PCAOB.14 The Free Enterprise Fund sets forth two main arguments for why SOX's provisions governing appointment and removal of the PCAOB are unconstitutional.15 First, it argues that SOX violates the Appointments Clause because the PCAOB members are "principal officers" who must be nominated by the President, not the SEC commissioners.16 It believes that the members of the PCAOB are principal officers because of their extensive power granted through SOX and the lack of SEC oversight of their operations. …

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