Question

The audit committee of a company must be made up of:

(1)Representatives from the client's management, investors, suppliers, and customers.
(2)The audit partner, the chief financial officer, the legal counsel, and at least one outsider.
(3)Representatives of the major equity interests, such as preferred and common stockholders.
(4)Members of the board of directors who are not officers or employees.

Answer 1

An audit committee is typically composed of independent board members and is essential for unbiased financial oversight within a company. The Lehman Brothers case highlights the consequences when corporate governance fails to ensure accurate financial reporting to investors.

Step-by-step explanation:

The makeup of an audit committee is a critical aspect of corporate governance. The audit committee should primarily consist of members of the board of directors who are not officers or employees of the company. This independence is crucial because it allows the audit committee to provide unbiased oversight of the firm's financial reporting and internal controls. While the audit committee may involve large shareholders, their role generally does not include executives such as the audit partner, the chief financial officer, or the legal counsel directly since these positions may present conflicts of interest. It is important to note that each company's governance structure may differ based on regulatory requirements and internal policies.

In the case of Lehman Brothers, the failure of corporate governance points to the importance of an effective audit committee that can safeguard the interests of all stakeholders, especially smaller investors who rely on accurate financial information.