The Sarbanes-Oxley Act of 2002 was enacted in response to corporate scandals that largely centered on the quality of corporate financial disclosure and highlighted the inadequate oversight of management, auditors and the Board of Directors. The Sarbanes-Oxley Act addresses the problems related to inadequate board oversight by requiring public companies to have an:
a. Internal auditor.
b. Annual audit for all issuers.
c. Audit committee.
d. Independent Board of Directors.
Choice "c" is correct. Public companies are required to establish an audit committee that is directly responsible for the appointment, compensation and oversight of the work of the public accounting firm employed by that public company. The separation of audit supervision from the Board of Directors addresses the problem of inadequate board oversight.
Choice "b" is incorrect. An annual audit provides meaningful information about financial reporting but it does not address the issue of board oversight.
Choice "d" is incorrect. The independence of the Board of Directors may provide some assurance about the objectivity of the board but does not address the issue of board oversight.
Choice "a" is incorrect. An internal audit function improves the control environment but it does not engage the Board of Directors in oversight.