Under Sarbanes-Oxley, who must be on the audit committee?

The requirement that the audit committee be composed of outside directors is based on the Sarbanes-Oxley Act's intent to enhance corporate governance and ensure the independence of financial oversight. Outside directors, or independent directors, are individuals who do not have a material relationship with the company and are not part of its management team. This independence is crucial because it helps to eliminate potential conflicts of interest and ensures that the audit committee can effectively oversee financial reporting and ethics without undue influence from company executives.

Having outside directors on the audit committee helps to protect the interests of shareholders and enhances the integrity of the financial reporting process. Their role is to ensure that the company’s financial statements are accurate, that the internal controls are effective, and that the company complies with legal and regulatory requirements.

In contrast, inside officers or directors are part of the company's management and have a vested interest in its operations and outcomes, which could cloud their judgment when it comes to audits.