Audit Committees 2

Audit Committee-Its formation and roles [Corporate Social Responsibility. Assignment1] Vivek Shukla Roll no. 09 PGDM-1 Date: 13-02-09 Concerned Faculty : Prof. V.V Ravikumar

Corporate Governance Through Audit Committees The Audit Committee of the Board is today seen as a key fulcrum of any company. Being mandatory under Clause 49 and section 292A of the Companies Act -1956, the Audit Committee can be of great help to Board in implementing, monitoring and continuing good corporate governance practices to the benefit of the company and its stakeholders. The Audit Committee is formed to regularly review processes and procedures to ensure the effectiveness of internal control systems so that the accuracy and adequacy of the reporting of financial results is maintained at high level at all times. It is important for the members of Audit Committee to have formal knowledge of accounting and financial management or experience of interpreting financial statements.

Provisions of Audit Committees and Its Formation As required by section 292A of the Companies Act, 1956, every public limited company (listed or unlisted) having a paid-up capital of at least Rs. 5 crore shall constitute a Committee of the Board to be known as Audit Committee. The Audit Committee is formed by the members of the Board’s of Director. The provisions in respect of the same are as follows: 1) Committee members are drawn from members of the Company's board of directors, with a Chairperson selected from among the members. 2) The Chairperson should be an independent Director. 3) The Committee shall have at least three (3) members (directors). 4) Two-third (2/3) of the members shall be non-executive directors. 5) The Board of Directors shall prescribe the Committee’s terms of reference in writing. 6) Auditors—internal and external—and Director (Finance) shall attend the meeting but not have right to vote. 7) The Chairman of the Audit Committee shall attend the annual general meeting to provide clarifications on matters relating to audit. 8) The constitution and composition of the Audit Committee is to be disclosed in the annual report of the Company. 9) 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. 10)The Listing Agreement requires at least one director having financial management and accounting knowledge expertise to be a member of Audit Committee while other members should be financially literate. Section 292A(5).

Functions of Audit Committee under Section 292A The Audit Committee constituted under this section shall act in accordance with terms of reference to be specified in writing by the Board. The Audit Committee should have periodic discussions with the auditors about the following matters: (a) Internal Control System. (b) Scope of audit including the observation of auditors. (c) Review the half-yearly and annual financial statement before submission to the Board. (d) Compliance of internal control system. The Audit Committee shall also have authority to investigate into the matters in relation to the items specified in this section or matters referred to it by the Board of Directors. To carry out such investigation the Audit Committee will have full access to information contained in the records of the Company and external professional advice, if necessary. The recommendations of the Audit Committee on any matters relating to financial management including the audit report shall be binding on the Board. In case the Board does not agree with the recommendations made by the Audit Committee, the Board shall record the reasons for disagreement and communicate the same to the shareholders to be reported in Annual General Meeting.

Functions of Audit Committee under Clause 49 Revised clause 49 of the listing agreement provides for specific requirements of an Audit Committee. The companies shall be required to comply with the requirements of clause 49 in relation to Audit Committees, viz: Audit Committee stands upon four fundamental pillars to discharge its functionsl • Financial Management including responsibility, integrity, objectivity of information of financial reports and transparency in disclosures. • Auditing – - Internal - External • Legal compliance to ensure – - Legal compliance - Charter compliance - Audit independence - Review and assessment of financial implications of litigations and claims against the Company - Ensuring security of assets accounting standards and going concern. • Communication and quality assurance – - With shareholders - Presentation of Board of Directors - Quarterly reviews - Compliance of Accounting Standards - Preparation and improvement in the Audit Committee charter - Selection of members of the Audit Committee - Appraisal and performance review

Generally the major Functions of Audit Committee are as follows: * overseeing the Company’s financial reporting process and disclosure of financial information to ensure that the financial statements are correct, sufficient and credible, * recommending the appointment and removal of external auditor, fixation of audit fee and approval for payment of any other services, * reviewing with the Management the annual financial statements before submission to the Board, * reviewing with the Management the annual financial statements of the subsidiary companies, * reviewing with the Management and the external and internal auditors, the adequacy of internal control systems, * reviewing the adequacy of internal audit function, * discussing with internal auditors any significant finding and follow up on such issues, * reviewing the findings of any internal investigations by the internal auditors in matters where there is suspected fraud or irregularity, or a failure of internal control systems of a material nature, and then reporting such matters to the Board, * discussing with external auditors before the audit commences on the nature and scope of audit, as well as having post-audit discussion to ascertain any area of concern, * reviewing the Company’s financial and risk management policies; and * examining reasons for substantial default in the payment to depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors, if any. In addition to the areas noted above, the Audit Committee looks into the controls and security of the Company’s critical IT applications, internal and control assurance audit reports of all the major divisions and deviations from the Code of Business Principles, if any.