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Case 15.1
FREE ENTERPRISE FUND AND BECKSTEAD AND WATTS, LLP, V. PUBLIC COMPANY
ACCOUNTING OVERSIGHT BOARD
Supreme Court of the United States
561 U.S. 477; 130 S. Ct. 3138; 2010 U.S. LEXIS 5524 [June 28, 2010]
FACTS:
In 2002, Congress enacted the Sarbanes-Oxley Act (SOA) to regulate the accounting industry.
Congress created (PCAOB or Board) as a part of this Act.
The Board consists of five members who are appointed by the Securities and Exchange
Commissioners (SEC).
Board members serve five year, staggered terms and are not considered Government officers or
employees. This allows for the recruitment from the private sector since the Board members’
salaries are not subject to government limitations.
The members can be removed by the SEC Commissioners only “for good cause.”
This arrangement concerning the appointment and potential removal of Board members makes the
PCAOB a Government created, Government-appointed entity with expansive powers to govern an
entire industry (public accounting firms). It further makes the Board members insulated from the
direct suspension of the SEC Commissioners.
After the Board’s release of a negative report about Beckstead and Watts, L.L.P., a public
accounting firm, this lawsuit was filed.
The Free Enterprise Fund along with Beckstead and Watts, L.L.P., challenged the constitutionality of
the Sarbanes-Oxley Act regarding the creation and operation of PCAOB.
The basis of the challenge is that Board members are not subject to the appointed powers of the
President of the United States.
The United States Government joined in the suit to defend the Sarbanes-Oxley Act and the PCAOB.
PROCEDURE: The District Court granted summary judgment in favor of the United States, and the D.C.
Circuit Court of Appeals affirmed.
ISSUE(S): (1) Is the Constitution’s separation of powers doctrine violated by the Sarbanes-Oxley Act
which provides for the removal of Board members by only the SEC?
(2) Do the provisions in the Sarbanes Oxley Act violate the Appointments Clause?
DECISION: The judgment of the United States Court of Appeals for the District of Columbia Circuit is
RULE(S): (1) “The Constitution provides that the executive Power shall be vested in a President of the
United States of America,” (Article II, Section 1, Cl. 1) Also, Madison stated on the floor of the First
Congress, “if any power whatsoever is in its nature Executive, it is the power of appointing, overseeing,
and controlling those who execute the laws.”
(2) “The Appointments Clause necessarily contemplates collective appointments by the ‘Courts of
Laws,’” (Article II, Section 2, Cl. 2) and each House of Congress, too, appoints its officers collectively.”
REASONING:
1. The executive power includes a power to oversee executive officers through removal because that
traditional executive power was not “expressly taken away, it remains with the President.”
2. The SOA protects Board members from removal except for good cause, but withdraws from the
President any decision on whether good cause exists. The result is a Board that is not accountable
ADDITIONAL INFORMATION:
The Act places the Board under the SEC’s oversight, particularly with respect to the issuance of
rules or the imposition of sanctions (both of which are subject to Commission approval and
alteration). But the individual members of the Board—like the officers and directors of the self-
regulatory organizations—are substantially insulated from the Commission’s control. The
