The government of the United States formulated the Sarbanes- Oxley Act in 2002 following an increase in the number of firms that presented to courts with allegations of financial misconduct and abuse of power by the stakeholders. This law addressed many issues in the cooperate market thus leading to thus solving many wrangles that linked stakeholders with fraudulent acts on the investors. The institution of this law helped in the restoration of the confidence of investors in the commercial markets. The law mandates cooperates especially those that are public limited companies to foster the strengths of the audit committees, directly focus liabilities on the executive officers and increase transparency in financial reports. The Act also offers a set of repercussions in terms of fines to be borne by any officers who commit unscrupulous business practices regarding the securities exchange and company capital. These rules and regulations are applicable in arguing out the legality of the case involving the non-profit organization, Free Enterprise Fund versus Public Company Accounting Oversight Board (PCAOB).
Many pessimists feel that the laws introduced by the Sarbanes-Oxley (SOX) Act have not improved the corporate environment per se. However, it is important to note that this act has increased accountability, improved the ethics that govern capital markets, brought reforms in financial auditing and the disclosure process. Introduction of these reforms has helped in the creation of a healthier business environment that limits the chances of swindling of finances by the firm’s management. Debatably, the changes that the SOX brought in the corporate world are evident. The implementation of these guidelines through their use in determination of lawsuits against companies has therefore become commonplace since their adoption into the market. The biggest of these improvements has been on the internal auditing of financial records. According to the act, this is a function of the audit committees but not a role of the management officials such the president of a company (Zacharie, 2012).
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The case of Free Enterprise Fund versus Public Company Accounting Oversight Board obtained its verdict based on the provision of the SOX Act. In this suit, Free Enterprise Fundquestioned the legality of SOX provisions in the matters concerning the appointment of the members of the Public Company Accounting Oversight Board that did not offer full powers to the president in making these appointments. Nevertheless, the president was the ultimate selector the associates of the Securities and Exchange Committee which chooses the members of the PCAOB (Rezaee, 2010).
The determination of the case ruled that the selection of the members of the PCAOB had not been against the provisions of the Appointment Clause but rather constitutional. The jury further ruled out that the president’s executive powers were still intact sinceverdict obeyed the separation of powers rule. By virtue, the president had the powers to choose the members of the Securities Exchange Committee that appoints the members of the PCAOB hence he still had an influence of the constituents of the board. The removal and appointment of the board members was therefore under the influence of the president.
With regard to the verdict of the jury, concerning the case above, it is arguable that members of the PCAB board should not entirely comprise of appointees from the investment community. This is so because the auditing of records is a collective task of all the players in a given firm. Sourcing the members from one pact of the stakeholders may lead to bias due to conflicts of interest that may arise. Notably, the Securities Exchange Committee decides on who to select for positions in the board and this selection exercise should include the rest of the stakeholders of the company. One of the improvements made by the SOX Act is to strengthen the audit committee and this can only be possible if the members come from a diverse pool of professionals within the organization(Reed, 2012). The capacity to make decisions based on the reports of the audit lies with everyone in the management positions. This is an important tool as it allows the each player to offer what they deem would be best for the company to achieve its goals.
The decision of the case strengthens the validity of the board in decision-making capacity within the organization. Since the court rules in favor of the board, it is valid to argue that the selection and the constitution of the board is lawful and hence its decisions regarding audits are autonomous. The ruling makes it more difficult and unlawful for the president to on his own accord since he cannot interfere with the function of the board. Such is true because separation of powers does not allow a president to interject into the affairs of the board by directly appointing or dismissing the members. Furthermore, the commerce clause and regulatory process stipulates that the state and the local governance do not have the rights to regulate commerce. This is entirely the role of the federal government (Reed, 2012).
In summation, the SOX Act of 2002 has brought numerous reforms especially in internal audits by strengthening the rules regarding the formation and roles of the audit committee. In the analysis of the case of Free Enterprise Fund versus Public Company Accounting Oversight Board, the decision of the judges is in tandem with the provisions of the SOX act hence making the committee constitutional. The powers of the president over the committee and his ultimate decision making capacity is limited if the verdict of the jury remains considerable.
References
Reed L.et al. (2015). The Legal and Regulatory Environment of Business . New York, NY: Springer.
Zacharie B. (2012). Free Enterprise Fund versus Public Company Accounting Oversight Board. California : Verpublishing.
Rezaee Z. (2010). Corporate Governance Post-Sarbanes-Oxley: Regulations, Requirements, and Integrated Processes . San Francesco, SA: John Wiley & Sons.
