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Role of Audit Committee in Corporate Governance: An Indian Perspective Introduction

In India, the concept of corporate governance is no longer a fashion statement; it has been embedded in the statutes namely Companies Act, 1956 and Clause 49 of the listing agreement. The corporate failures and the rising dissatisfaction with the functioning of the corporations gave rise to the need of reassuring the stakeholders; as a result the emphasis was laid on improving the corporate governance practices. Corporate Governance practices were desirable from all quarter’s i.e. alert shareholders, cautious customers, dedicated employees, conversant business associates, regulatory bodies, Government and to a certain extent by the companies themselves to improve their image in the eyes of the public.According to Cadbury Report (1992), “Corporate Governance is the system by which companies are directed and controlled”.

Today the audit committee of the board is being seen as the key pivot of any company. Being mandatory under Section 292A of the Companies Act, 1956 and Clause 49 of the listing agreement, the audit committee can be of facilitator of Board to implement, monitor and continue good corporate governance practices for the benefit of the company and its stakeholders. The main function of Audit Committee is to oversee the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. The Audit Committee can recommend to the Board, the appointment, re-appointment and, if required, the replacement or removal of the statutory auditor and the fixation of audit fees. The members of Audit Committee should have formal knowledge of accounting and financial management or experience of interpreting financial statements.

Provisions of Audit Committee under Section 292A

Section 292A of the Companies Act, 1956 requires that every public limited company (whether listed or unlisted) having a paid-up capital of at least Rs.5 crore should constitute a committee of the board to be known as Audit Committee. The provisions in respect of the same are as follows:

• The Committee shall have at least three (3) members (directors).

• Two-third (2/3) of the members shall be non-executive directors.

• The chair person should be an independent director.

• The Board of Directors shall prescribe the Committee’s term of reference in writing.

• The Audit Committee shall have the right to investigate any matter covered under the broad terms of reference.

• The statutory auditor, the internal auditor and director in-charge of finance shall attend every meeting of the audit committee but shall not have the right to vote.

• Half-yearly and annual accounts should be discussed by the audit committee with auditors before presenting the same to the Board.

• The Chairman of the Audit Committee shall attend the annual general meeting to provide clarifications on matters relating to audit.

• The constitution and composition of the Audit Committee is to be disclosed in the annual report of the Company.

• Any default in complying with the provision of section 292A may attract imprisonment up to one year or fine up to Rs. 50000 or both. The prosecution lies against the company and every officer of the company who is in default. The offence is compoundable under section 621A.Provisions of Audit Committee under Clause 49

Clause 49 is applicable to all the listed companies with the paid up capital of Rs 3 crores and above or net worth of Rs 25 crores or more at any time in the history of the company. Revised clause 49 of the listing agreement provides for specific requirements of an Audit Committee. The provisions are:

• The Audit Committee shall have minimum three directors as members. Two-third of the members of 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 (and particularly the head of the finance function) 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

• 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.Role of Audit Committee

The main role of audit committee is to oversee the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. It shall recommend to the Board, the appointment, re-appointment and, if required, the replacement or removal of the statutory auditor and the fixation of audit fees. The committee shall approve payment to statutory auditors for any other services rendered by them. It shall review with the management, the annual financial statements before submission to the board for approval. The Audit Committee should have discussions with the auditors periodically about internal control systems. The audit committee shall have power to investigate any activity within its terms of reference; to seek information from any employee, to obtain outside legal or other professional advice and to secure attendance of outsiders with relevant expertise, if it considers necessary.

Conclusion

The Audit Committee seeks to safeguard the interests of various stakeholders of an organization. It plays a crucial role in preventing fraudulent reporting. Corporate Governance seeks to ensure ethical business conduct and encompasses the timely and accurate disclosure of financial information. Good Corporate Governance starts from the top to percolate to the bottom. Mr. N.R. Narayana Murthy, Former Chairman and Chief Mentor, Infosys Technologies Ltd. can be quoted as the best example. To conclude, the backbone of corporate governance is to ensure adherence to ethics and audit committee can act as a monitor to ensure the ethical conduct.

About the Author

Rachna Gupta is an Assistant Professor in Accurate Institute of Management and Technology, Greater Noida (Top PGDM Institute Noida). She has experience of seven years in academics and five years in corporate as an Accociate Company Secretary. She has received Gold Medal at post graduation level. She is also a recipient of ‘Distinguished Faculty’ Award.

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