Auditing has been defined as an official financial examination of an individual's or an organization's accounts. During the process, the auditors will construct an audit trail which is a chronological record of transactions. This enables them to evaluate internal controls systems, its design and company policies, Norris (2010).
The PCAOB (Public Company Accounting Oversight Board) is a nonprofit corporation established by Sarbanes-Oxley Act, congress to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. Since year 2010 The PCAOB also oversees the audits of brokers and dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection, Bob Benoit (2008).
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Why PCAOB members should be taken from the investment community that uses audited financial statements
PCAOB was established as a Private board “nonprofit corporation” whose members and employees are not considered Government officers or employees. This was primarily what was established but the members are free to invest in the community therefore they will be bias on their part in the event that they are interested in investing, Norris (2010).
The Board is “a Government-created, Government-appointed entity, with expansive powers to govern an entire industry”. The Board is ‘part of the Government’ for constitutional purposes. This is seen in the Board’s extensive regulatory authority—including its authority to “promulgate auditing and ethics standards, perform routine inspections of all accounting firms, demand documents and testimony, and initiate formal investigations and disciplinary proceedings, Floyd (2010).
The PCAOB members though appointed by the SEC commissioners they do not get direct supervision from them. This creates many loopholes are to who is responsible for their actions and behaviors’. The Act does not even give the Commission power to fire Board members for violations of other laws that do not relate to the Act, the securities laws, or the Board’s authority. Even if they cheated on their taxes there is no law that governs that, Bob Benoit (2008).
Why PCAOB members should not be taken from the investment community that uses audited financial statements
The appointment of the members states that they can’t be removed by the President except for “inefficiency, neglect of duty, or malfeasance in office. The court had previously upheld limited restrictions on the President’s removal power. In those cases, however, only one level of protected tenure separated the President from an officer exercising executive power. It was the President or a subordinate he could remove at will who decided whether the officer’s conduct merited removal under the good-cause, Adam (2010).
The act not only protects Board members from removal except for good cause, but withdraws from the President any decision on whether that good cause exists. That decision is vested instead in other tenured officers the Commissioners none of whom is subject to the President’s direct control, Bob Benoit (2008).
How does the decision in this case impact the validity of the Board and other provisions of the Sarbanes-Oxley Act?
The decision in this case has resulted in creating a Board that is not accountable to the President, and a President who is not responsible for the Board. This has been brought about by the protection given to this board by the act. Without the protection between the Commission and the Board, the Commission could remove a Board member at any time, and therefore would be fully responsible for what the Board does. This will lead the President to hold the Commission to accountable for the supervision of the Board, to the same extent that he may hold the Commission to account for everything else it does, Adam (2010).
The Commissioners are not responsible for the Board’s actions. They are only responsible for determining whether the act stipulated has been met. Although the commissioners are responsible to the president they cannot remove any of the board members.
The President cannot delegate ultimate responsibility or actively supervise what goes on with the board because Article II makes a single President responsible for the actions of the Executive Branch, Norris (2010).
References
Case 15.3 Free Enterprise Fund v. Public Company Accounting Oversight Board"
Bob Benoit (January 11, 2008). The Lord & Benoit Report: The Sarbanes-Oxley Investment: A Section 404 Cost Study for Smaller Public Companies (PDF). Lord & Benoit, LLC.
Norris, Floyd; Liptak, Adam (June 28, 2010). Supreme Court Upholds Accounting Board. The New York Times.
