The Sarbanes-Oxley Act of 2002 (SOX) was spurred by past major accounting scandals that resulted in the loss of investor confidence. SOX, therefore, aims to protect investors by making corporate disclosures more accurate and reliable.

Role of Audit Committee

Thus, the role of the audit committee becomes essential in the effective execution of the SOX.

• One of the most significant effects of SOX is the increased responsibility and authority of the audit committee in a public company.
• The act strengthened the audit committee by requiring that all members be independent directors. To be independent, a director must not be affiliated with, or receive any outside compensation from the issuer.
• The expertise of the audit committee is enhanced by requiring that it have the power to hire independent legal counsel or other advisors as it deems necessary.
• The audit committees also must have at least one member designated as a financial expert with relevant experience. A financial expert must :
  • Understand GAAP and financial statements;
  • Be able to assess the general application of GAAP in accounting for estimates, accruals, and reserves;
  • Have experience with financial statements having a breadth and level of complexity comparable to those of the registrant;
  • Understand internal controls and the procedures for financial reporting, and understand audit committee functions.
• The audit committee must be directly responsible for appointing, compensating, and overseeing the work of the registered public accounting firm of the issuer. This firm must report directly to the audit committee:
  • All critical accounting policies;
  • All alternative treatments within GAAP discussed with management;
  • Ramifications of the alternative treatments and disclosures, and the treatment preferred by the firm.

The enhancements of the audit committee’s authority described above are supported by an additional requirement. Each issuer must provide appropriate funding to the audit committee. 

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