Since the Supreme Court has granted cert in Free Enterprise Fund v. PCAOB (see here), I thought I would share a summary of the facts of the case, which I prepared as a study guide for my Administrative Law class at University of Houston:

In 2002, following a series of accounting scandals that exposed weaknesses in the reporting requirements for publicly held companies, Congress passed the Sarbanes-Oxley Act of 2002 ("the Act" or "SOX"). Title I of the Act established the Public Company Accounting Oversight Board ("the Board" or "PCAOB") as a new entity to oversee the audits of public companies. The Board's purpose is "to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies the securities of which are sold to, and held by and for, public investors." In particular, the Act provides that:

The Board shall, by rule, establish, including, to the extent it determines appropriate, through adoption of standards proposed by 1 or more professional groups of accountants [which it shall designate] or advisory groups [which it shall convene], and amend or otherwise modify or alter, such auditing and related attestation standards, such quality control standards, and such ethics standards to be used by registered public accounting firms in the preparation and issuance of audit reports, as required by this Act or the rules of the Commission, or as may be necessary or appropriate in the public interest or for the protection of investors.

The five members of the PCAOB are appointed by the Securities and Exchange Commission ("the Commission" or "SEC") after consultation with the Chairman of the Board of Governors of the Federal Reserve and the Secretary of the Treasury. Appointment is by majority vote of the five SEC Commissioners. Two PCAOB members must be or have been certified public accountants. After its members are appointed by the SEC, the Board assumes its responsibilities only upon the Commission's determination that the Board has the capacity to carry out the Act's requirements (i.e., that it is properly organized and has appropriate rules and procedures in place). The Commission alone determines whether the Board may "sue and be sued" in any court.

(As for the Commissioners themselves, all five Commissioners are appointed by the President with Senate confirmation. SEC Commissioners can be removed by the President for cause (i.e., for inefficiency, neglect of duty, or malfeasance). The SEC Chairman is selected from among the Commissioners by the President, and serves as Chairman at the President's pleasure. The Chairman often dominates commission policymaking, controls the administrative side of commission business, selects most staff, and sets budgetary policy.)

A member of the Board may be censured or removed from office "for good cause shown" upon a finding by the Commission, after notice and opportunity for a hearing, that the member willfully violated the Act or abused authority, or failed to enforce compliance with a rule or standard without reasonable justification. The Commission is further empowered, by rule, to relieve the Board, consistent with the public interest, of any enforcement authority whatsoever, as well as, by order, to censure the Board and, after notice and opportunity for a hearing, to "impose limitations upon the activities, functions, and operations of the Board" upon finding that the Board has failed to abide by its statutory duties.

"No rule of the Board shall become effective without prior approval of the Commission." To approve a rule, the Commission generally must conduct its own notice-and-comment proceedings. The Commission "shall approve a proposed rule, if it finds that the rule is consistent with the requirements of [the] Act and the securities laws, or is necessary or appropriate in the public interest or for the protection of investors." The Commission is empowered to "abrogate, add to, and delete from" the Board's rules "to assure the fair administration of the [Board], conform the rules promulgated by that Board to the requirements of [the Act], or otherwise further purposes of [the] Act, the securities laws, and the rules and regulations thereunder applicable to [the] Board." The Commission itself is also empowered to promulgate rules in furtherance of the Act.

The Act requires auditors of public companies to register with the PCAOB by submitting applications to the PCAOB, filing periodic reports with the PCAOB, and paying fees to the PCAOB. The SEC may review the PCAOB's accounting support fee rules and denials of regulation applications. The PCAOB may inspect accounting firms and release interim reports detailing any deficiencies in advance of its final conclusions.

When the PCAOB investigates a potential securities law violation, the Board must both inform the Commission and coordinate its activities with the Commission. If a company violates PCAOB rules governing the auditing of public companies, it will be subject to disciplinary actions and sanctions by the PCAOB. Any violation of PCAOB rules "shall be treated . . . as a violation of the Securities Exchange Act of 1934." If the PCAOB determines, after investigation, that an accounting firm has committed a violation, it has the power to impose an appropriate sanction.

All Board adjudications are subject to the Commission's de novo review, upon an immediate stay when an application for review is filed or sua sponte by the Commission. Sanctions imposed by the PCAOB are generally stayed pending Commission review of the inspection report. The Commission is empowered to "enhance, modify, cancel, reduce, or require the remission of a sanction imposed by the Board." The Commission may alter or cancel a sanction imposed by the PCAOB if, "having due regard for the public interest and the protection of investors," the SEC finds that the sanction is "not necessary or appropriate in furtherance of this Act or the securities laws" or is "excessive, oppressive, inadequate, or otherwise not appropriate." Final Commission decisions are reviewable by the Court of Appeals.

Acme Accountants, an accounting firm registered with the Board and subject to an ongoing formal investigation, seeks declaratory and injunctive relief prohibiting the Board from proceeding, arguing that the structure of the Board violates various separation of powers doctrines. What arguments could Acme make, and how would those issues be resolved?

For two possible answers, read the case.

UPDATE: See Michael Greve's article here.