Introduction
The Sarbanes-Oxley Act of 2002 was passed into law on the same year in July 30. It was enacted as a means of creating oversight on the matters of auditing and accounting of publicly traded companies. For this reason, it is referred to as the Public Company Accounting Reform and Investor Protection Act or alternatively the Corporate and auditing Accountability Responsibility and Transparency Act. The law was established as a means of expanding the responsibilities of the boards of these public companies, their management and the accounting firms that conducted audit practices. This law through a number of provisions would direct the actions that are employed by private companies. Due to numerous financial fraud scandals surrounding the various financial institutions in America, the Public Company Accounting Oversight Board (PCAOB) would oversee the practices of the auditing professionals. Accurate and authentic auditing is essential in these public companies as it ensures that public investors are protected from fraudulent practices. The following paper addresses the concern on membership of this board and whether it should include individuals from the investment community that use the audited financial statements.
Auditing of Financial Statements and PCAOB Membership
Through the creation of the board, the government identifies the importance of the financial statements and auditing practices as a means of guaranteeing the investing community protection from fraudulent practices. In light of this, members of the PCAOB should be taken from the investing community. When the members are all individuals who have invested their personal wealth into the stock of a particular organization, it is less likely that the financial statements will be fraudulent (Franzel, 2012). The board members will oversee the auditing practices and review the results of its performance closely particularly for businesses that are usually associated with fraudulent practices such as the finance institutions. Due to the close attachment of the board members, the auditing will be conducted almost flawlessly ensuring that the needs of the investors are protected in each case (Reed, Pagnattaro, Cahoy, & Shedd, 2013). This practice almost certainly guarantees the truthful disclosure by corporations of their financial statement. Failure to practice the same will result in negative consequences for the company.
Delegate your assignment to our experts and they will do the rest.
The board as with the Sarbanes-Oxley Act was established due to the occurrence of fraudulent practices. Numerous firms during the early 21 st Century were subject to accounting malpractices (Franzel, 2012). There were various organizations such as WorldCom, Tyco International plc, and Enron Corporation that were identified to have been involved in accounting fraud. This occurrence resulted in investor confidence as the general public sought to save up their hard-earned money rather than make investments (Franzel, 2012). Even when organizations undertake accurate financial statements, majority of the public do not believe in them perceiving them as falsified. In this regard, incorporating the individuals in the investor community as part of the PCAOB is a wise technique of increasing investor confidence. The investors will be able to oversee the auditing of the various companies and determine whether their practices have been up to standard (Franzel, 2012). As the membership in the board is for a limited 5-year term, this practice allows for the participation of different investors preventing the occurrence of fraudulent practices between the board members and the public companies.
Impact of Court Case on the Validity of the Board and other Provisions of SOX
The case Free Enterprise Fund vs. Public Company Accounting Oversight Board (PCAOB) significantly added to the validity of the board. The court decision by the Supreme Court identified that the method that was incorporated in the removal of members of the PCAOB was inconsistent with the separation of powers that is highlighted by the US Constitution (Krotoszynski Jr, 2012). Previously, the provisions of the Sarbanes-Oxley Act identified that the members of the board had dual layers in the method of their removal from office by the action of the President. In this regard, these officers could only be removed ‘for good cause’ that is presented by professionals working with the Securities and Exchange Commission (SEC) (Krotoszynski Jr, 2012). The SEC officers, could also only be removed by the President for malfeasance and neglect of duty or inefficiency in their roles. This rule protected the members of the board from direct influence of the president even though he had the power to eliminate high ranking SEC officials (Krotoszynski Jr, 2012). By the removal of this law it ensured that the president can now oversee the performance of the officers whose roles directly influence the execution of the laws. This makes the board a valid institution of the government in making efforts to increase trust in financial auditing and winning over the confidence of the investors (Krotoszynski Jr, 2012).
The court decision now ensures that the members of the PCAOB can be removed from office at will by the SEC officials. This practice ensures that the other aspects of the SEC oversight on this board, its structure and programs that are running will not be affected (Krotoszynski Jr, 2012). There are numerous provisions affected including the rule that the board be active within 270 days after enforcement and the need to appoint members within 90days. The court decision also emphasizes the power of the SEC on the board through delegating rules and modifying them, reviewing disciplinary issues among members, criticizing them and removing them from office.
References
Franzel, J. M. (2012, Sep. 13) Keynote Address - PCAOB: Protecting Investors and the Public Interest . PCAOB, Retrieved from https://pcaobus.org/News/Speech/Pages/09132012_FranzelALICLEConference.aspx
Krotoszynski Jr, R. J. (2012). Cooperative federalism, the new formalism, and the separation of powers revisited: Free Enterprise Fund and the problem of presidential oversight of state-government officers enforcing federal law. Duke Law Journal , 61.8: 1599-1669
Reed, O. L., Pagnattaro, M. A., Cahoy, D. R., & Shedd, P. J. (2013) The Legal and Regulatory Environment of Business (16 th Ed.) . New York: McGraw-Hill/Irwin.
