USA: Whistle blowing protection and the Sarbanes-Oxley Act 2002

Earlier this month the Supreme Court gave judgment in Lawson v FMR LLC: see here (pdf). The case concerned the whistle blowing protection provided by section section 1514A of 18 US Code, introduced by section 802 ("Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud") of the Sarbanes-Oxley Act 2002. At the relevant time, Section 1514A provided that “No [public] company . . . , or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of [whistleblowing or other protected activity].”

The issue before the court was the extent of the section 1514A protection: did it apply only to employees of the public company? The court held, by majority, that it applied not only to employees of the public company but also to the employees of contractors and subcontractors (e.g., investment advisers, law firms and accounting firms).

USA: House of Representatives backs Bill to prohibit PCAOB from introducing mandatory audit firm rotation

The House of Representatives yesterday voted, by 321 to 62, to pass a Bill to prohibit the Public Company Accounting Oversight Board from requiring public companies to use specific auditors or require the use of different auditors on a rotating basis: see here. Further information about the Bill, which now goes to the Senate for consideration, is available here. In 2011 the PCAOB issued a concept release in which views were sought on the introduction of mandatory rotation: see here.

USA: the 10th anniversary of the Sarbanes-Oxley Act

Ten years ago today the Sarbanes-Oxley Act was signed into law by President George W. Bush. The anniversary was the subject of a short hearing last week held by the Committee on Financial Services. Written evidence, with some comments on the JOBS Act which was passed into law earlier this year, is available here. A webcast of the hearing is available here.

USA: Sarbanes-Oxley - PCAOB member removal provisions unconstitutional according to Supreme Court

The Supreme Court ruled earlier this week in Free Enterprise Fund et al v Public Company Accounting Oversight Board et al: see here (pdf). A majority of the court held that provisions in the Sarbanes-Oxley Act regarding the removal from office of Public Company Accounting Oversight Board members were unconstitutional and should be severed from the Act.

The Act provided that the Board members were removable by the Securities and Exchange Commission only for good cause; the effect of the court's decision is that they are now removable at will. Chief Justice Roberts, delivering the (majority) opinion of the court, stated:

Neither the President, nor anyone directly responsible to him, nor even an officer whose conduct he may review only for good cause, has full control over the Board. The President is stripped of the power our precedents have preserved, and his ability to execute the laws — by holding his subordinates accountable for their conduct — is impaired. That arrangement is contrary to Article II’s [of the Constitution] vesting of the executive power in the President".

USA: Section 404 of the Sarbanes-Oxley Act 2002 and small public companies

The Securities and Exchange Commission has announced the extension of Section 404 of the Sarbanes-Oxley Act (2002) to small public companies in respect of annual reports ending on or after June 15, 2010. Such companies and their auditors will therefore be required to report on the effectiveness of internal controls. Further information is available here.

USA: Supreme Court to consider the constitutionality of the Public Company Accounting Oversight Board

The Public Company Accounting Oversight Board was created by the Sarbanes-Oxley Act (2002) to oversee the auditors of public companies. The PCAOB's duties include registering public accounting firms; establishing auditing, quality control, ethics, independence and other standards relating to public company audits; conducting inspections, investigations and disciplinary proceedings of registered accounting firms; and enforcing compliance with the Sarbanes-Oxley Act (2002).

The constitutionality of the PCAOB was challenged last year in Free Enterprise Fund and Beckstead and Watts LLP v PCAOB et. al., No. 07-5127, 22 August 2008 before the Court of Appeals for the District of Columbia Circuit. It was argued that Sarbanes-Oxley (2002) violated the Appointments Clause of the Constitution and separation of powers because it did not permit adequate Presidential control of the PCAOB. By majority the court rejected these arguments. The case will, however, be heard by the Supreme Court: the Order List for May 18 records that leave to appeal has been granted.