The present economic scenario has heightened the need for influential audit committees. The financial downfall and apparent fraudulent activities at well-known companies, even some NPOs, and phenomena such as the credit crunch and ongoing economic instability, are well known to the public. Moreover, new companies also face unique challenges triggered by their less-developed internal control structures. As a result, both prevailing and new companies have an even greater need for independent oversight. This article will discuss the Audit Committee of the Board of a company and its importance.
An Overview on the Audit Committee of Board of Company
The Audit Committee is one of the principal pillars of the corporate governance system of any business. It plays an anchor role in supporting the Board in fulfilling its Corporate Governance and keep a check on the oversight responsibilities in various areas. The Audit Committee aims to enhance confidence in the credibility of-
- Company’s financial reporting process and internal control procedures and
- Procedures and risk management processes.
Applicability for the Appointment of Audit Committee of Board of a Company
As per Section 177 of the Act read with rule 6 of the Companies (Meetings of the Board and its Powers) Rules, 2014-Every listed Company and the below-mentioned classes of companies are required to underpin an Audit Committee of the Board-
(i) All public companies having a paid-up capital of ten crore rupees or more.
(ii) All public entities having a turnover of one hundred crore rupees or more.
(iii) All public companies having aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more. The paid-up share capital or outstanding loans or turnover or borrowings or deposits or debentures , as the case may be, as prevailing on the date of the last audited financial statements shall be considered for this Rule.
Composition of Audit Committee of Board of a Company
The composition of the Audit Committee of the Board of a Company is mentioned below-
As per the Companies Act, 2013: —
- It shall consist of a minimum of 3 directors with independent directors forming a majority.
- The majority of the Audit Committee members shall be persons with the ability to read and understand the financial statements. It shall include its Chairman.
As per the SEBI (LODR) Regulations, 2015:—
- The Committee must have a minimum of 3 directors as members of the Audit Committee.
- Two-thirds of the members shall be independent directors. Also, the chairperson of the audit committee shall be an independent director.
- The Company Secretary shall work as the secretary to the audit committee.
- All the Committee shall be financially literate, and at least one member shall have accounting or related financial management expertise.
Meeting and Quorum of Audit Committee of Board of a Company
Under Companies Act, 2013
The Companies Act, 2013 does not have any provision that mandate the inclusion of frequency of meeting for the Audit Committee. However, under Secretarial Standard – 1, the Audit Committee must meet as often as necessary subject to requirements prescribed by any other law.
Under SEBI (LODR) Regulation,2015
The audit committee shall meet atleast 4 times a years. However, not more than one hundred and twenty days shall elapse between two meetings. The quorum for this committee meeting shall either be two members or 1/3 of the audit committee’s members, whichever is greater, with at least two independent directors
Purpose of appointing the Audit Committee of the Board of Company
The primary purpose of the Audit Committee of the Board of a Company is to:
A. Help the Board in its oversight responsibilities to shareholders, specifically concerning:
1. To keep a check on the Company’s financial statements,
2. To examine the Company’s compliance with legal and regulatory requirements,
3. To check the qualifications and independence of the independent auditor and internal audit function,
4. To review the performance of the Company’s internal audit function and independent auditor, and
B. Draft audit committee report required by the SEC’s proxy rules to be included in the Company’s annual proxy statement.
Primary Duties and Responsibilities of Audit Committee of Board of a Company
The Audit Committee of the Board of a Company performs various duties and responsibilities are to:
A. Examine the reliability of the Company’s internal controls for financial reporting.
B. Examine the competence, independence, and the work of the Company’s independent auditors and the Internal Audit function.
C. Establish a method for communication between the Board and the auditor independent, internal auditor, the Management, and other affected individuals.
D. As an advisory committee of the Board, assists the Board in fulfilling its fiduciary obligations to shareholders and the Company. The Committee can conduct or authorize inquiries into any issue that fall within the Committee’s responsibility, according to the terms of the Charter. In addition, it shall be able to directly communicate with the independent auditor and anyone within the Company.
Audit Committee of the Board of a Company
The Audit Committee of Board of Company has the following power-
Under the Companies Act,2013
1. The Audit Committee is vest with authority to request the opinions of auditors on internal control systems as well as the scope of the Audit, the findings of the auditors, and the examination of financial statements before the submission before the Board. The Committee can also discuss the relevant issues with the internal and statutory Auditor and the Management of the Company.
2. The Audit Committee has the authority to examine any issue related to the problems specified in guidelines or referred to by the Board. For this reason, the Committee can seek professional advice from sources outside of the Company. In addition, the Committee to conduct its investigation will be fully able to access the business documents.
3. The auditors of the Company and the top management employees have the right to be heard at sessions of the Audit Committee when it considers the auditor’s report. However, they do not be able to vote.
Also, as per SEBI LODR Regulation, the Audit Committee has the power to –
(i) To look into any activity within its terms of reference,
(ii) seek information from any employee,
(iii) Get outside legal or other professional advice,
(iv) Get attendance of outsiders with relevant expertise if it
Audit Committee of Board of a Company and Vigil Mechanism
Subsections (9), (10) of section 177 of the Companies Act, 2013, as well as Rule 7 of the Companies (Meetings of the Board as well as its Powers) Rules, 2014, stipulate that each listed Company and companies belonging to the following classes or classes must create a vigilance mechanism for their employees and directors to express their genuine grievances or concerns.
(a) The companies that will accept public deposits.
(b) Companies that have borrowed money from banks or public financial institutions that exceed fifty crore rupees.
The companies establishing a Vigil Mechanism shall oversee the monitoring mechanism of an Audit Committee. The vigil procedure should offer adequate safeguards against the exploitation of those using the instrument and provide direct communication with the Chairperson and the Chairperson of the Audit Committee in appropriate or extraordinary circumstances. The details regarding the establishment of the vigil process must be made public on the Company’s portal, if it has one, and in the Board’s report.
Disclosure in Board’s Report
The report of the Board has to provide the members that the Audit Committee is composed. If the Board did not accept any of the recommendations of the Audit Committee, the same is required to be stated in the report of the Board and the reasons for that.
To summarize, we can say that the Audit Committee of the Board of a company is considered one of the significant corporate governance mechanisms. It ensures Internal Financial Control and helps with the risk management system.