Reading and Interpreting IBM’s Report of Management IBM’s 2006 annual report includes the following selected paragraphs from its Report of Management found on page 54:

IBM maintains an effective internal control structure. It consists, in part, of organizational arrangements with clearly defined lines of responsibility and delegation of authority, and comprehensive systems and control procedures. An important element of the control environment is an ongoing internal audit program. Our system also contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. . . .

PricewaterhouseCoopers LLP, an independent registered public accounting firm, is retained to audit IBM’s consolidated financial statements and management’s assessment of the effectiveness of the company’s internal control over financial reporting. Its accompanying report is based on audits conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States). . . .

The Audit Committee of the Board of Directors is composed solely of independent, nonmanagement directors, and is responsible for recommending to the Board the independent registered public accounting firm to be retained for the coming year, subject to stockholder ratification. The Audit Committee meets periodically and privately with the independent registered public accounting firm, with the company’s internal auditors, as well as with IBM management, to review accounting, auditing, internal control structure and financial reporting matters.

Required:

1. Describe the main components of IBM’s internal control structure.

2. Who is IBM’s external auditor? In addition to auditing IBM’s financial statements, what else does this firm audit? What body’s standards does the firm follow in conducting its audit?

3. What is the composition of IBM’s Audit Committee? Describe its role.