Audit Committee- Section 177 | Companies Act, 2013 & Rules

Article explains about Audit Committee under Section 177, Rule 6 and 7 of Companies (Meetings of Board and its Powers) Rules, 2014, Composition of Audit Committee, Functions of Audit Committee, Powers of Audit Committee, Vigil Mechanism and Penalty for Violation of Audit Committee Provisions.

Introduction:

Audit Committee is of the major operating committees of a company’s Board of Directors that is in charge of seeing the financial reporting and disclosures.

Legal Reference for Audit Committee

The Companies Act,2013 has notified Section 177, Rule 6 and 7 of Companies (Meetings of Board and its Powers) Rules, 2014 which deals exclusively with Audit Committee.

Applicability as per above Legal reference:

*Amended by Companies (Amendment) Act, 2017, Earlier there was “every Listed Company”.

Composition of Audit Committee:

Audit Committee shall constitute of minimum 3 Directors, with independent director forming majority. Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial statement.

The auditors and KMP of the company shall have a 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.

Functions of Audit Committee:

1. Appointment and fixation of the remuneration of the Auditor.

2. Valuation of the undertakings or assets of the company.

3. Evaluation of any Related Party Transaction (also for omnibus approval under Rule 6A)

4. Evaluation of the Internal financial control and risk management.

5. Examination of the Financial Statements.

6. Scrutiny of Inter Corporate Loans and Investments.

7. Evaluation of the use of the funds rose through public offers.

Powers of Audit Committee:

• Call for comments of the Auditor about Internal Control Systems.
• To Review the Financial Statements before submission of the report of the Board.
• Power to discuss any issues with the Statutory & Internal Auditor and the Management of the company in relation to matters contained in the Financial Statements.
• Power to obtain professional advice from the external sources.
• Power to have full access to the information contained in the records.

Vigil Mechanism:

Vigil Mechanism provides adequate safeguard against victimization of persons. It is established for directors and employees to report their grievances and concerns. Rule 7 of Companies (Meetings of Board and its Powers) Rules,2014 describes about establishment of Vigil Mechanism for every Listed Company and companies prescribed below:

• Companies which accepts deposits from public.
• Companies which have borrowed money from banks and public financial institutions in excess of Rs. 50 Crores.

The Board of Directors shall nominate a director to play the role of Audit Committee for the purpose of Vigil Mechanism for reporting purpose. The aggrieved person will have direct access with the Chairperson/Nominated Director of the Audit Committee.

In case of repeated frivolous complaints, the audit committee or the director nominated can take suitable action against the concerned director or employee including reprimand.

The details of establishment of such mechanism shall be disclosed on the company’s website, and in the Board ‘s report.

Penalty for Violation of Audit Committee Provisions:

The company shall be punishable with fine of Rs. 1 Lakh to Rs. 5 Lakhs and every officer of the company who is in default shall be punishable with imprisonment up to 1 year or with fine of Rs. 25,000/- to Rs. 1 Lakh, or with both.