AUDIT COMMITTEE

[Mr. M. GOVINDARAJAN]

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.