CGVE/U2 Topic 2 Audit Committee
An Audit Committee may be defined as a committee or sub-group of the full Board of Directors formed for overseeing and monitoring, on behalf of the board, preparation of meaningful financial statements and reports, relying on senior financial management, internal and external auditors.
Composition of an audit committee depends on relevant provisions, if any, of Statute(s) or requirements of stock exchanges and/or regulatory authorities like SEBI.
Functions of Audit Committee:
An audit committee’s basic function is to act as a catalyst for efficient and transparent financial reporting and as a bridge between the board, the internal auditors and the statutory (external) auditors.
The major detailed functions of an audit committee include overseeing the process of financial reporting and disclosure of financial information to ensure correct, adequate and reliable financial statements; reviewing draft annual financial statements with reference, inter alia, to changes in accounting policies and practices, compliance with going concern assumption, accounting standards, legal and stock exchange requirements, qualifications in draft auditor’s report, if any, before submission to the board; discussing with management, internal and/or external auditors the adequacy or otherwise of internal control and internal audit systems, important findings of internal auditors (including irregularities) and follow-up thereon; checking material defaults, statutory or otherwise.
Statutory Obligations of Audit Committee:
The new Section 292A introduced by the Companies (Amendment) Act, 2000, contains detailed provisions relating to audit committee, which are summarised below:
(a) Every public company having a paid-up capital of Rs. 5 crore or more must constitute an audit committee.
(b) The committee shall comprise a minimum of 3 (three) directors and such other number of directors as the Board may determine; two-thirds of the total number of members of such a committee must be directors other than the managing or whole-time directors. The members shall elect a Chairman of the committee from among themselves.
(c) The committee shall act according to the terms of reference set in writing by the Board. The auditor, the internal auditor, if any, and the director-in-charge of finance, must attend and participate at meetings of the committee without any voting rights. The committee should interact periodically with the auditors about internal control systems, scope of audit including observations of auditors, review half-yearly and annual financial statements before submission to the Board and also ensure compliance with internal control systems.
(d) The committee is empowered and authorised to probe any matter specified in the terms of reference and, for that purpose, to have full access to information contained in the company’s records and, if required, external professional expert advice.
(e) The audit committee’s recommendations on financial management and audit report shall be binding on the Board. The Board must record reasons for non- acceptance of such recommendation, if any, and communicate the same to shareholders.
(f) The annual report of the company must disclose the composition of the audit committee.
(g) The Chairman of the committee must attend the company’s annual general meeting to provide any clarifications on matters re: audit.
SEBI Requirements for Audit Committee:
The Kumarmangalam Birla Committee on Corporate Governance constituted by the Securities and Exchange Board of India (SEBI) has made extensive recommendations on audit committee vide paragraphs 9.1 to 9.10 of its report, which are mandatory for companies whose shares are listed on stock exchange(s).
The major aspects of these recommendations are enumerated below:
(a) Audit committee is one of the essential tools of corporate governance, which promotes an hierarchy of sound accountability and credibility in financial reporting and fosters confidence of shareholders and investors.
(b) Audit committee is widely recognised as an effective instrument for overseeing the financial reporting system.
(c) A qualified and independent audit committee should be constituted by the Board of Directors of a company. Independence is determined or influenced by the degree of economic or financial relationships of a director with the company, its management or any other director except right to remuneration for attending board meetings.
(d) Having regard to expertise and independence, an audit committee should have at least 3 (three) members, being non-executive directors, majority being independent, with at least one director possessing financial and accounting knowledge. Executives considered appropriate, finance director and, if required, a representative of the external auditor should be invited to meetings of the committee. The Company Secretary should be the Secretary to the committee.
(e) The audit committee should meet at least thrice every year, once every six months and once before finalisation of annual accounts. The quorum should be a minimum of 2 (two) members or one- third of the members, whichever is higher, with two independent members.
(f) The powers of the audit committee, which emanate from the Board’s authorisation, include power to investigate any matter within the terms of reference, to obtain information from the records or any employee(s) of the company, to secure legal or other professional or expert advice, if required.
(g) The role and functions of an audit committee should include the following major aspects:
(i) Overseeing and monitoring the process of financial reporting and disclosure of financial information to ensure accurate, adequate and reliable financial statements.
(ii) Recommending appointment or removal of auditor and fixation of fees for audit and other services, if any.
(iii) Reviewing draft financial statements before submission to the Board with reference to going concern assumption; company’s financial and management policies; changes in accounting policies and practices; major accounting entries based on judgment exercised by management; compliance with accounting standards, legal and stock exchange requirements re : financial statements, if any; material transactions of the company, if any, with promoters, their subsidiaries or relatives conflicting with the company’s interests; reviewing with management, internal and external auditors the adequacy of internal control systems and internal audit functions (including coverage, frequency and reporting structure and discussions on any significant findings thereof and follow-up thereon); discussion with external auditors about nature and scope of audit before commencement of audit, important adjustments arising out of audit and qualifications in draft audit report; checking substantial defaults in payments to depositors, share-/debenture- holders, creditors.
The directors and management of every concerned company should effectively comply with the statutory provisions (Section 292A) and rules of relevant regulatory agencies like SEBI, which has accepted the recommendations of the Kumar Mangalam Birla Committee.