Audit Committee: A Keystone to Corporate Governance

AUDIT COMMITTEE

(A KEYSTONE TO THE CORPORATE GOVERNANCE FOR THE COMPANIES!!!!)

OVERVIEW:

An “AUDIT COMMITTEE” is a key element in the corporate governance process of any organization.

An audit committee is an operating committee of a company’s Directors that is in charge of overseeing financial reporting and disclosure.

An audit committee includes selected number of members of a company’s board of directors who responsible for reviewing its own company’s business activities to identify inefficiencies, reduce cost and achieve organizational objectives.

The audit committee is responsible for hiring the auditors, resolving disputes with the auditors, and assess and disclosing the auditor’s reports.

The audit committee plays an evaluative (critical) role in:

> Providing oversight (supervision)

> serving as a check And

> balance

On a Company’s Financial Reporting System.

The Primary Purpose of an audit committee is to provide:

• independent review
• inspection of a company’s financial reporting process
• assessments of company’s records
• the audit of financial statements
• the effectiveness of internal control
• The Compliance with laws and regulations.

The main purpose of Audit Committee is to help in looking over the audit and to protect the interests of investors which also includes the interest of the public in the preparation of:

• Informative,
• Accurate AND
• Independent

Audit Reports.

OBJECTIVE OF THE FORMATION OF AUDIT COMMITTEE:

√ To help the board of directors in looking over the integrity of the company’s financial statements.

√ To look into the matter related with legal and regulatory compliance, including the functioning of internal audit.

√ It also plays a lead role in establishing Vigil Mechanism.

ROLE OF AUDIT COMMITTEE

1. To recommend for the appointment of auditors and monitoring their independence and performance.

2. To review the performance and effect of the same with regard to Audit Process.

3. To examine the financial statement and the auditors’ report.

4. To Approve or any subsequent modification of transactions of the company with related parties.

Provided that the audit committee may make Omnibus approval for related party transactions asper Companies (Amendment) Act, 2015, notified dated 26^th May, 2015

5. Scrutiny of inter-corporate loans and investments as per Section 186 of Companies Act, 2013

6. Valuation of undertakings or assets of the company.

7. Evaluation of internal financial controls and risk management systems.

8. Monitoring the end use of funds raised through public offers.

FUNCTIONS OF AUDIT COMMITTEE

√ To boost the confidence among the members.

√ To investigate into the matters observed and referred by board.

√ To discuss about matters related to internal control system

√ To carry out oversight functions including financial statements, financial reporting process and system of internal accounting and financial control.

√ To maintain accuracy and consistency of information.

√ To uphold the principles of independent review of audit process.

√ To create confidence that audit reports are prepared on taking into the account of the interest of the citizen.

POWERS OF AUDIT COMMITTEE

• To open access to management and right to seek additional information’s.
• To call attendance of the committee members when required.
• To meet auditors (external and internal) without management.
• To seek information from any employees.
• To obtain outside legal and other professional advice.

RESPONSIBILITIES OF AUDIT COMMITTEE

♦ To Provide an independent review of bank financial reporting and

♦ To provide the financial information prepared by management.

♦ To provide assurance (guarantee) on the governance.

♦ To Provide inspection of accounting policies and professional accounting requirements.

♦ To appoint the external auditor.

♦ To comply with the company’s rules and regulations by following Companies code of conduct and ethics.

AUDIT COMMITTEE UNDER COMPANIES ACT,2013

In Accordance With Section 177 read with Rule 6 of the companies (Meetings of the board and its powers) Rules, 2014 under Companies Act 2013 which provides that the following Class of Companies shall constitute an Audit committee of the board:

• Every LISTED COMPANY

AND

• Every Other public company:

(a) Having paid up capital of 10 crores or more

(b) all public company having turnover of 100 crores or more

(c) Which having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 crores or more.

Note: The above mentioned terms used, Paid up Capital and Turnover is defined u/s 2(64) of the Companies Act, 2013 and 2(91)of the Companies Act, 2013.

NOTE:

• The paid up share capital OR
• turnover OR
• outstanding loans, or
• borrowing or
• debentures or
• deposits,

As the case may be, as existing on the date of last audited Financial Statements shall be taken into account for the purpose this rule.

VIGIL MECHANISM (WHISTLE-BLOWING MECHANISM)

Following hereunder are the objectives behind establishment of vigil mechanism:

• It provides for adequate safeguards against exploitation of employees and directors
• To provide direct access to the chairperson of the audit committee
• To encourage ethical corporate behavior in the Company.
• To reward and motivate employees for sharing valuable information to the management

As per Section 177, Read with Rule 7 of companies (Meetings of Board and its powers) Rules, 2014, following are the companies which shall establish a vigil mechanism for directors and employees to report genuine concerns or grievances:

• Every listed company AND
• The other class of Companies which shall:
  • Accept deposits from the public,
  • Have borrowed money from banks and public financial institutions excess of Rs.50 Crores.

COMPARISON OF AUDIT COMMITTEE UNDER CA, 1956 WITH THAT OF CA, 2013

COMPANIES, 2013	COMPANIES ACT, 1956
Applicable section is 177	Applicable section is 292A read with Clause 49 of listing agreement
Every listed company AND all public company with paid up capital of Rs.10 Crores or more; all public companies having turnover of Rs. 100 Crores or more; all public companies, having in aggregate , outstanding loans or borrowings or debentures or deposits exceeding 50 croreshave to constitute the Audit Committee.	Every public company having paid up capital of not less than Rs. 5 Crores have to constitute the Audit Committee.
It does not require attendance of chairman at the AGM.	It requires attendance of chairman at the AGM to advice on the matters related to audit.
The auditors of the company and the KMP shall have the right to be heard in the meetings of the audit committee when it considers the auditor’s report but shall not have the right to vote.	As per Section 292A(5) of CA,1956, Auditors, Internal auditors if any, and the director in charge of finance shall attend and participate at the meeting of Audit committee but shall not have right to vote.
Minimum of 3 Directors Independent director forming a majority. Majority of members including  chairperson shall be persons with ability to read and understand the financial statements	The audit committee shall consist of not less than 3 directors, 2/3rdof the number of total strength of its members, shall be the directors other than MD or WTD.
Penal provisions are now more strict and stringent for both Company and officers in default.	Penal provisions are not that much rigorous and tough.

A BRIEF LOOK ON THE LAWS APPLICABLE TO AUDIT COMMITTEE

Section 177 of  Companies Act, 2013	Every Listed Company and other class as defined in Rules require to constitute Audit Committee.
Section 92(f) of Companies Act, 2013	To mention the meetings of audit committee and its attendance details in the annual return.
Rule 6 of Companies (Meetings of board and its powers) Rules, 2014.	Abovementioned Class of Companies to constitute the Audit committee of Board
Rule 7 of Companies (Meetings of board and its powers) Rules, 2014.	Establishment of vigil mechanism
Rule 3 of companies (Audit and Auditors) Rules, 2014.	Involvement of Audit Committee in appointment and selection of Auditors

CONSTITUTION OF AUDIT COMMITTEE

The audit committee shall consist of a minimum of 3 directors with independent directors forming a majority.

Provided that majority of members of audit committee including its chairperson shall be the person who shall be able to read and understand the financial statements.

MCA NOTIFICATIONS

√ MCA NOTIFICATION DATED 5^TH JUNE 2015

MCA exempted section 8 company from the requirement of having majority of independent directors in the Audit Committee.

√ MCA NOTIFICATION DATED 12^TH JUNE 2014

MCA inserted in rule 6 which provides that the public companies covered under this rule which were not required to constitute their Audit Committee u/s 292A of companies Act 1956 shall constitute their Audit committee within one year from the commencement of these rules or appointment of independent directors by them, whichever is earlier.

HEREUNDER ARE THE OTHER PROVISIONS WITH REGARD TO AUDIT COMMITTEE

♦ Maximum one year time should be given to reconstitute the audit committee in accordance with the provisions of section 177.

♦ As per section 177(7) The auditors and key managerial personnel (KMP) have right to be heard in the meetings of the Audit committee when it considers the auditor’s report but shall not have the right to vote in the meeting.

♦ As per section 177(8) The Board’s report shall disclose the composition of an audit committee and when the board had not accepted any recommendation, the same shall be disclosed in such report along with the reasons.

PENAL PROVISIONS UNDER SECTION 177 OF CA, 2013

In Case Of Any Contravention of Section 177:

√ BY COMPANY: fine which shall not be less than 1,00,000 rupees but which may extend to 5,00,000 rupees

√ BY OFFICER IN DEFAULT: Imprisonment for a term which may extend to one year

OR

 Fine which shall not be less than Rs 25,000 but which may extend to Rs 1, 00,000 or with both.

CRUX:

The audit committee is formed to regularly review processes and procedures to ensure the efficacy (success) of internal control systems so that the accuracy and competence of the reporting of financial results is maintained at high level at all times.

Thus, the role of audit committee is to perform as a catalyst(channel) for effective and transparent financial reporting. Hence, Penal provisions are now more strict and stringent for both Company and officers in default in Companies Act, 2013.