Final answer:
The Sarbanes-Oxley Act mandates that all public companies establish an internal audit committee to oversee financial reporting and auditing, as a measure to protect investors and enhance trust in financial disclosures following historic accounting scandals.
Step-by-step explanation:
To reduce fraud opportunities and improve companies' internal control over financial reporting, the Sarbanes-Oxley Act (SOX) requires all public companies to establish an internal audit committee. This is in response to major accounting scandals involving corporations such as Enron, Tyco International, and WorldCom. SOX was designed to increase confidence in the financial information provided by public corporations and to protect investors from accounting fraud. Thus, among the choices given, the correct one is that public companies must establish an internal audit committee. The audit committee plays a vital role in corporate governance by monitoring the integrity of financial statements, ensuring that legal and regulatory requirements are met, and overseeing the company's internal and external auditors.
Historically, the board of directors serves as a fundamental line of corporate oversight, supplemented by external auditors who review financial records and outside investors, such as large mutual funds or pension funds. However, in cases like Lehman Brothers, these mechanisms failed, highlighting the need for stringent measures like those imposed by SOX.