Final answer:
Publicly traded companies are required by PCAOB AS 2201 to have an audit of the effectiveness of their ICFR, ensuring internal controls are appropriate and effective. This is a measure intended to protect investors from the kinds of corporate governance failures seen in cases like Lehman Brothers.
Step-by-step explanation:
According to PCAOB (Public Company Accounting Oversight Board) Auditing Standard No. 2201, publicly traded companies are required to have an audit of the effectiveness of internal control over financial reporting (ICFR). This standard is part of the Sarbanes-Oxley Act of 2002, enacted to protect investors from fraudulent financial reporting by corporations. The requirement is designed to ensure that companies maintain adequate internal controls that prevent misstatements in financial reports and that they operate effectively. It was in response to corporate scandals, such as the one involving Lehman Brothers, where corporate governance failed to provide accurate financial information about the firm's operations. On the other hand, privately traded companies are not obligated under PCAOB AS 2201 to have such audits, though they may be required to follow other standards or regulations depending on their circumstances.
The auditing firm plays a crucial role in corporate governance, serving as a reviewer of the company's financial records and providing certification that the information appears reasonable. It represents a fundamental check against corporate fraud and misrepresentation which can be detrimental to shareholders and the public at large. Furthermore, it is required for companies to provide clear note disclosures for any change in inventory method and to clearly disclose which financial investments are being accounted for at fair value, to enhance transparency and ensure stakeholders are properly informed.