AUDIT COMMITTEE

By: Mr. M. GOVINDARAJAN : View Profile

Clause 49 of listing agreements provides for the compliance of mandatory
requirements and non mandatory requirements for better Corporate
Governance. Committee on Financial aspects of Corporate Governance
recommended that all listed companies should establish an audit
committee and places great emphasis on the importance of properly
constituted audit committees in raising standards of Corporate
Governance. In U.K. there is a steady growth in the number of audit
committee. Audit committees are now established in 53% of the top 250
industrial firms and the figures raises to 66% if unlisted companies and
foreign subsidiaries are excluded from the calculation. Audit Committees
are well established in the United Stated, where they have been a listing
requirement of the New York Stock Exchange since 1978. 97% of the
major corporations have audit committees.
Report of Kumar Mangalam Birla Committee indicates that a system of
good corporate governance promotes relationships of accountability
between the principal actors of sound financial reporting - the board, the
management and the auditor. It holds the management accountable to the
board and the board accountable to the shareholders. The Audit
Committee's role flows directly from the Board's oversight function. It acts
as a catalyst for effective financial reporting. The committee recommends
as how to constitute the audit committee; frequency of meetings and
quorum; powers of the audit committee, functions of the audit committee.
Naresh Chandra Committee report as well as N.R. Narayanamurthy
committee report provide for the establishment of audit committee. Clause
49 of listing agreement provides the following for audit committee:
QUALIFIED AND INDEPENDENT AUDIT COMMITTEE:
A qualified and independent audit committee shall be set up, giving the
terms of reference subject to the following:
The audit committee shall have minimum three directors as members.
Two thirds of the members of the audit committee shall be independent
directors;
 All members of audit committee shall be financially literate and at least
one member shall have accounting or related financial management
expertise;
 The Chairman of the Audit Committee shall be an independent director;
 The Chairman of the Audit Committee shall be present at Annual General
Meeting to answer shareholder queries;
 The audit committee may invite such of the executives, as it considers
appropriate to be present at the meetings of the Committee, but on occasions
it may also meet without the presence of any executives of the company. The
Finance Director, head of internal audit and a representative of the statutory
auditor may be present as invitees for the meetings of the audit committee;
 The Company Secretary shall act as the Secretary to the Committee.
 MEETING:
The audit committee should meet at least four times in a year and not
more than four months shall elapse between two meetings. The quorum
shall be either two members or one third of the members of the audit
committee whichever is greater, but there should be a minimum of two
independent members present.
POWERS:
The Audit Committee shall have the powers which should include the
following:
To investigate any activity within its terms of reference;
 To seek information from any employee;
 To obtain outside legal or other professional advice;
 To secure attendance of outsiders with relevant expertise, if it considers
necessary.
ROLE OF AUDIT COMMITTEE:
The role of audit committee shall include the following:
Oversight the company's financial reporting process and the disclosure of
the financial information to ensure that the financial statement is correct,
sufficient and credible;
 Recommending to the Board, the appointment, re-appointment and, if
required, the replacement or removal of the statutory auditor and the fixation
of audit fees;
 Approval of payment to statutory auditors for any other services rendered
by the statutory auditors;
 Reviewing with the management the annual financial statements before
submission to the board for approval, with particular reference to:
 Matters required to be included in the Director's Responsibility Statement
to be included in the Board's Report in terms of Clause (2AA) of Sec. 217 of
the Companies Act, 1956;
 Changes, if any, in accounting policies and practices and reasons for the
same;
 Major accounting entries involving estimates based on the exercise of
judgment by management;
 Significant adjustments made in the financial statements arising out of
audit findings;
 Compliance with listing and other legal requirements relating to financial
statements;
 Disclosure of any related party transactions;
 Qualifications in the draft audit report.
 Reviewing, with the management, the quarterly financial statements
before submission to the Board for approval;
 Reviewing, with the management, the statement of uses/application of
funds raised through an issue, the statement of funds utilized for purposes
other than those stated in the offer document/prospectus/notice and the
report submitted by the monitoring agency monitoring the utilization of
proceeds of a public or rights issue, and making appropriate
recommendations to the Board to take up steps in the matter;
 Reviewing, with the management, performance of statutory and internal
auditors, adequacy of the internal control systems;
 Reviewing the adequacy of internal audit function, if any, including the
structure of the internal audit department, staffing and seniority of the official
heading the department, reporting structure coverage and frequency of
internal audit;
 Discussion with internal auditors any significant findings and follow up
thereon;
 Reviewing the findings of any internal investigations by the internal
auditors into matters where there is suspected fraud or irregularity or a failure
of internal control systems of a material nature and reporting the matter to the
Board;
 Discussing with statutory auditors before the audit commences, about the
nature and scope of audit as well as post audit discussion to ascertain any
area of concern;
 To look into the reasons for substantial defaults in the payment to the
depositors, debenture holders, shareholders and creditors;
 To review the functioning of the Whistle Blower mechanism, in case the
same is existing;
 Carrying out any other function as is mentioned in the terms of reference
of the Audit Committee.
REVIEW OF INFORMATION BY AUDIT COMMITTEE:
The Committee shall mandatorily review the following information:
Management discussion and analysis of financial condition and results of
operations;
 Statement of significant related party transactions submitted by
management;
 Management letters/letters of internal control weaknesses issued by the
statutory auditors;
 Internal audit reports relating to internal control weaknesses; and
 The appointment, removal and terms of remuneration of the Chief Internal
Auditor shall be subject to review by the Audit Committee.
The above are the requirements to be complied with by the listed
companies in respect of audit committee for better Corporate Governance.
The Companies Act, 1956 does not indicate about Audit Committee. Sec.
158 of the Companies Bill, 2008 provide the following in respect of audit
committee:
Ø The Audit Committee shall consist of a minimum of three directors with
independent directors forming a majority and at least one director having
knowledge of financial management, audit or accounts;
Ø The Chairman of an Audit Committee shall be an independent director;
Ø Every Audit Committee of a company existing immediately before the
commencement of this Act, shall, within one year of such commencement,
be reconstituted in accordance with the above two points;
Ø Every Audit Committee shall set in accordance with the terms of
reference specified in writing by the Board which shall include, among
other things, the recommendation for appointment of auditors of the
company, examination of the financial statements and auditors' report
thereon, transactions of the company with related parties, valuation of
undertakings or assets of the company, wherever it is necessary,
evaluation of internal financial controls and related matters;
Ø The Audit Committee may call for the comments of the auditors about
internal control systems, the scope of audit, including the observations of
the auditors and review financial statements before their submission to the
Board;
Ø The Audit Committee shall have authority to investigate into any matter
in relation to the items referred to it by the Board and for this purpose shall
have power to obtain professional advice from external sources and full
access to information contained in the records of the company;
Ø The auditors of a company and the key managerial personnel shall
have a right to attend the meetings of the Audit Committee when it
considers the auditor's report but shall not have the right to vote;
Ø The Board's report shall disclose the composition of an Audit Committee
and where the Board had not accepted any recommendation of the Audit
Committee, the same shall be disclosed in such report along with the
reasons therefore.
Thus much importance is given to the Audit Committee. Importance is
given to independent directors to participate in the Audit Committee. It is
also required that one member of the audit committee should have the
knowledge in accounting, financial wing. The good working system of
Audit Committee in a company will bring a better result and image to the
company.