Technical Guide on the
Functioning of Audit Committee
and its Review Checklist
Corporate Laws & Corporate Governance Committee
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
Technical Guide on the
Functioning of Audit Committee
&
Its Review Checklist
Corporate Laws & Corporate Governance Committee
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
© The Institute of Chartered Accountants of India
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form, or by any means, electronic
mechanical, photocopying, recording, or otherwise, without prior permission,
in writing, from the publisher.
First Edition : July 2018
Committee/Department : Corporate Laws & Corporate Governance
Committee
E-mail : clcgc@icai.in
Website : www.icai.org
Price : Rs. 80/-
ISBN No. : 978-81-8441-930-6
Published by : The Publication Department on behalf of the
Institute of Chartered Accountants of India. ICAI
Bhawan, Post Box No. 7100, Indraprastha Marg,
New Delhi 110 002, India.
Printed by : Sahitya Bhawan Publications, Hospital Road, Agra
282 003
July/2018/1,000
Foreword
The Audit Committee is inter alia responsible for liaison with the
management; internal and statutory auditors, reviewing the adequacy of
internal controls and compliance with the significant policies, procedures and
reporting to the Board on key issues. The idea of having independent
directors on the Audit Committee originates from the concept of effective
Corporate Governance. The Independent Directors bring objectivity to Board
decisions, protect common interest of the company and its stakeholders. The
Companies Act 2013 requires certain classes of companies to constitute
Audit Committee.
I am happy that the Corporate Laws & Corporate Governance Committee has
taken this initiative of bringing out the publication titled- "Technical Guide on
the functioning of Audit Committee and its Review Checklist" which is a
comprehensive and self-contained reference document for the guidance of
Audit committee on its functions, role, duties and ensuring effectiveness. As
the name suggest, this Guide also provides a checklist for review of the Audit
Committee.
I extend my sincere appreciation to the entire Committee and specially
commend the efforts put in by CA. Debashis Mitra, Chairman, Corporate
Laws & Corporate Governance Committee and CA. Dhinal A. Shah, Vice
Chairman of the said Committee for bringing out this publication at an
appropriate time.
I am sure that this publication would be a source of knowledge enrichment
and of great help to the members and other stakeholders.
CA. Naveen N.D. Gupta
President ICAI
Date: 26th June, 2018
Place: New Delhi
Preface
The role of Directors has undergone a significant change consequent to the
changes in the economic and regulatory environment. The Companies Act,
2013 (the Act) and the SEBI Regulations are illustrations of legislations
affecting the functioning of the Board.
The Board of Directors being central to the Governance of Companies play a
key role in ensuring that the Companies work in the best interest of the
shareholders and other stakeholders.
The Audit Committee is a sub committee of the Board .It is responsible for
oversight of financial reporting and disclosure resulting in integrity of the
company's financial reporting, the internal control processes and procedures
and the risk management system. The Act mandates every listed company
and certain other classes of companies to constitute an Audit Committee.
The Technical Guide aims to provide guidance on Duties and Role of Audit
Committee for ensuring its effectiveness. Important Frequently Asked
Questions from part of the Guide. A Specimen Checklist for Performance
Evaluation of Audit Committee finds a place in the Publication.
My sincere thanks to CA Naveen N. D. Gupta, President and CA Prafulla.
P. Chajjed, Vice-President for their encouragement and support in bringing
out the publication.
I also wish to place on record my sincere thanks to CA Dhinal. A. Shah, Vice-
Chairman of the Committee, all the Committee members, special Invitees
and all the Council Members for their suggestions, support and guidance in
finalizing this guide. My special thanks to CA. Mohit Bhuteria & CA. Srikumar
Banerjee for their efforts.
I wish to place on record my gratitude to all the Members of Kolkata,
Bhubaneswar and Hyderabad Study Groups who have contributed with
valuable inputs.
I commend the efforts made by the Committee Secretariat composed of CA
Sarika Singhal, Ms. S. Rita, Ms. Seema Jangid and CA. Ashita Jain and team
for their technical and administrative support.
I am confident that this Technical Guide would be of use to the members and
other interested readers.
Chairman
Corporate Laws & Corporate Governance Committee, ICAI
Date: 26th June, 2018
Place: New Delhi
Contents
S. No Particulars Pages
1. Background & Introduction of the Audit Committee 1-7
2. Practices Around the Globe 8-19
3. Requirement of Audit Committee 20-22
4. Duties of the Audit Committee 23-24
5. Role of Audit Committee 25-26
6. Effectiveness of Audit Committees 27-29
7. Specimen Audit Committee Charter 30-40
8. Specimen Checklist for Performance Evaluation of Audit 41-45
Committee
9. Frequently Asked Questions on Audit Committee 46-53
10. Schedule IV- Code for Independent Directors 54-59
Chapter I
Background and Introduction of Audit
Committee
With the opening of the Indian economy in 1991 towards globalization, the
Indian corporate world required a world-class governance system. Truly, the
essence of corporate world lies in promoting compliance of law in letter and
spirit, transparency, accountability and above all, fulfilling the fair
expectations of all the stakeholders. In real terms, the concept of corporate
governance should be a faith not force, and balance between conformance
and performance. In fact, it is a field in economics that demands attention not
only to the specific needs of the corporations but also to the many legal,
political, economic and social factors now demanded by society. The basic
objective of corporate governance is to build up an environment of trust and
confidence, at least in the wake of corporate collapses across the globe
during past few years; it may even be viewed as to restore faith, leading to
enhance shareholders' value and protect the interest of other stakeholders
by enhancing the corporate performance and accountability.
Since beginning of the 21st Century or little before that, both the Indian
Economy and Capital Markets have consistently been recording an
appreciable growth trajectory which brought it considerable global attention
and admiration. Such turn around could largely be attributed to the maturity,
competitiveness and observation of good governance practice by the Indian
Corporations. Corporate Governance, in traditional terms, refers to structures
and processes for directing and controlling companies. Good corporate
governance can provide companies in emerging markets better access to
outside capital by making them more attractive targets for portfolio
investments. Greater transparency and better internal control are apparently
considered to be the key components of good governance.
Background
The concept of audit committees was recognized in U.S.A. in 1940 when the
Securities Exchange Commission (SEC) recommended establishment of
Audit Committee in context of Mckesson Robdies Inc. investigation. it was
felt necessary to raise the level of conduct of the business community and
TG on the Functioning of Audit Committee & Its Review Checklist
advocated for a truly independent character in Board of Directors of
companies through the constitution of Audit Committee consisting of
independent directors. In 1973, NYSE in its white paper titled
`Recommendations and Comments on Financial Reporting to Shareholders
and Related Matters' recommended that each listed company should
constitute a Corporate Audit Committee consisting of 3 to 5 directors. This
suggestion finally took form when the SEC approved a rule proposed by
NYSE requiring all domestic companies listing common stock to constitute an
independent Audit Committee by July 1, 1978. In UK, the recommendations
of the Hampel Committee Report recognized the establishment of Audit
Committee. The major recommendations of the Audit committee came from
the Blue Ribbon Committee on improving the effectiveness of corporate
governance. Para C.3.1 of the U.K. Corporate Governance Code requires
listed companies to establish an audit committee of at least three, or in the
case of smaller companies, two independent non-executive directors. It is
pertinent to mention here that the requirement of mandating constitution of
an audit committee by small companies was mandated in line with the
Hampel Committee Report, 1998. The Report was not in favour of relaxing
the need to constitute an audit committee solely on the basis of the size of
the company.
The OECD (Organisation of Economics Corporation and Development) Code
of Corporate Governance while prescribing the responsibility of the Board
provides that:
"Board member should act on a fully informed basis, in good faith, with due
diligence and care, and in the best interest of the company and the
shareholders. Where board decision may affect different shareholder groups
differently, the board should treat all shareholders fairly. The Boards should
apply high ethical standards. It should take into account the interest of
stakeholders. The board should be able to exercise objective independent
judgment on corporate affairs.
Boards should consider assigning a sufficient number of non-executive
members capable of exercising independent judgment to tasks where there
is a potential for conflict of interest .Examples of such key responsibilities are
ensuring the integrity of financial and non-financial reporting , the review of
related party transactions, nomination of board member and key executive
and board remuneration.
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Background and Introduction of Audit Committee
When committees of the board are established, their mandate, composition
and working procedures should be well defined and disclosed by the board.
Board members should be able to commit themselves effectively to their
responsibilities."
The aforestated Code also states the following regarding an audit committee:
"The audit committee or an equivalent body should provide oversight of the
internal audit activities and should also be charged with overseeing the
overall relationship with the external auditor including the nature of non audit
services provided by the auditor to the company. Provision of non-audit
services by the external auditor to a company can significantly impair their
independence and might involve them auditing their own work. To deal with
the skewed incentives which may arise, the disclosure of payments to
external auditors for non-audit services should be required. Examples of
other provisions designed to promote auditor independence include, a total
ban or severe limitation on the nature of non-audit work which can be
undertaken by an auditor for their audit client, mandatory rotation of auditors
(either partners or in some cases the audit partnership), a fixed tenure for
auditors, joint audits, a temporary ban on the employment of an ex-auditor by
the audited company and prohibiting auditors or their dependents from
having a financial stake or management role in the companies they audit.
Some countries take a more direct regulatory approach and limit the
percentage of non-audit income that the auditor can receive from a particular
client or limit the total percentage of auditor income that can come from one
client."
The Sarbanes Oxley Act, 2002, which legislated the role and composition of
the audit committee, mandates that:
(1) The Audit committee of an issuer of securities registered with the SEC
has responsibility for the appointment, compensation and oversight of
any registered public accounting firm employed to perform audit
services.
(2) It shall establish procedures for the "receipt, retention, and treatment
of complaints" received by the issuer regarding accounting, internal
controls and auditing.
(3) Each audit committee shall have the authority to engage independent
counsel or other advisors, as it determines necessary to carry out its
duties.
3
TG on the Functioning of Audit Committee & Its Review Checklist
(4) Each issuer shall provide appropriate funding to the audit committee.
(5) The audit committee must pre approve non-audit services for the
issuer and all of its consolidated subsidiaries whether those
subsidiaries are separate issuers or not.
(6) The accounting firm must report to the audit committee all critical
accounting policies and practices to be used, all alternative treatments
of financial information within GAAP that have been discussed with
management including the ramifications of the use of such alternative
disclosures and treatments, and the treatment preferred" by the firm.
(7) Audit committee members must be a member of the board of directors
of the issuer, and to be otherwise independent.
(8) The SEC shall issue rules to require issuers to disclose whether at
least one member of its audit committee is a "financial expert".
Section 303A.07 of the Listed Company Manual issued by The New York
Stock Exchange and approved on August 22, 2013 which, inter alia, provide
that an audit committee must:
(1) Have at least three independent directors, each of whom is financially
literate and at least one of whom has accounting or financial
management expertise.
(2) Have a formal written charter and code of business conduct that has
been adopted and approved by the board of directors.
(3) Assist Board oversight of the integrity of the company's financial
statements, the company's compliance with legal and regulatory
requirements, the independent auditor's qualifications and
independence and the performance of the company's internal audit
function and independent auditors.
(4) Set clear hiring policies for employees or former employees of the
independent auditors. Atleast annually, obtain and review an report by
the independent auditors describing the firm's internal quality control
procedures, any material issues raised by the most recent internal
quality control review, or any external review, and all relationships
between the independent auditor and the company.
(5) Discuss the annual financial statements and quarterly financial
statement with management and the independent auditor, including
4
Background and Introduction of Audit Committee
disclosure under `Management's Discussion and Analysis of Financial
Condition and Results of Operations'.
(6) Discuss earning press releases as well as financial information and
earning guidance provided to analysts and rating agencies.
(7) Discuss policies with respect to risk assessment and risk
management.
(8) Meet separately, periodically, with management, with internal auditors
and with independent auditors.
(9) Review with the independent auditor and audit problems or difficulties
and management's response.
(10) Report regularly to the board of directors.
(11) Each listed company must have an internal audit function..
In India, the concept of audit committee initially gained its importance as a
measure of self-discipline, adopted by certain large companies, which
availed term loans from public financial institutions. In the banking sector,
pursuant to Joint Parliamentary Committee's report (1983), the RBI issued
necessary instructions for the constitution of Audit committee.
The concept was further advocated strongly by the Parliamentary Standing
Committee on Companies (Second) Amendment Bill, 1997 in its 64 th Report
and High Level Expert Working Group on the Companies Act, 1956.
Thereafter, the importance gained its place and became mandatory in the
Companies Act. 1956 by an amendment brought into force by the Companies
(Amendment) Act. 2000 [vide Section 292A].
The maiden attempt on amendment to the listing requirements relating to
compliance of conditions of corporate governance followed after the report of
Kumar Managalam Birla Committee constituted by the Securities and
Exchange Board of India in the year 2000. The Birla Committee Report on
Corporate Governance recommended for a constitution of Independent Audit
committee in case of listed companies of a certain size. The
recommendations of the committee were brought into force through the
listing requirements.
In nutshell, the Audit committee is inter alia responsible for liaison with the
management; internal and statutory auditors, reviewing the adequacy of
internal control and compliance with significant policies and procedures,
5
TG on the Functioning of Audit Committee & Its Review Checklist
reporting to the Board on the key issues .The quality of Audit Committee
significantly contributes to the governance of the company. Traditionally the
role of the Audit Committee was to oversee the audit function be it internal or
external and to ensure that proper internal quality control systems are in
place. Additionally it was to also oversee the non-audit services provided by
the external auditor such that providing such services did not impair their
independence or lead to them auditing their own work. Overtime and with the
promulgation of Securities and Exchange Board of India (Listing Obligations
And Disclosure Requirements) Regulations, 2015 (LODR, 2015), the role and
responsibility of Audit Committee has increased manifold. Apart from
overseeing the audit process, the Committee is also expected to handle
whistle blower complaints, scrutinize inter-corporate loans and investments,
evaluate risk management systems and protect minority interests in case of
related party transactions. Hence as a sub-set of the Board, the Audit
Committee is tasked with a number of responsibilities which require careful
handling and reasoned understanding of the company and its processes.
Introduction
The Audit Committee is one of the main pillars of the Corporate Governance.
The main function of an Audit Committee is oversight of financial disclosures,
reporting, internal and external audits, internal control, accounting, regulatory
compliance and risk management. Its main aim is to strengthen the
confidence of stakeholders in the company's financial statements and
announcements, its internal control process and the risk management
process.
As per Section 292A of the Companies Act 1956, every public company
having paid-up capital of not less than five crores of rupees-shall constitute a
committee of the Board known as Audit Committee which shall consist of not
less than three directors and such number of other directors as the Board
may determine of which two-thirds of the total number of members shall be
directors, other than managing or whole-time directors.
Further, as per the Listing Agreement which is applicable to all listing
companies, such companies are duly required to constitute an Audit
Committee with a prescribed set of responsibilities.
With the enactment of the Companies Act, 2013 and the Rules thereunder
according to Section 177(1) of the said Act, Board of Directors of every listed
6
Background and Introduction of Audit Committee
company and such other class or classes of companies, as may be
prescribed, shall constitute an Audit Committee.
As per Rule 6 of the Companies (Meetings of Board and its Powers) Rules,
2014, the Board of Directors of every listed public company and the following
classes of companies shall constitute an Audit Committee and a Nomination
and Remuneration Committee of the Board:
All public companies having:
· Paid-up Capital ` 10 Crore;
· Turnover ` 100 Crore;
· Loans + Debentures + Deposits ` 50 Crore.
The Sarbanes-Oxley Act of 2002 increased Audit Committees'
responsibilities and authority. It raised membership requirements and
committee composition to include more independent directors. Companies
were required to disclose whether or not a financial expert is on the
Committee. Further, the Securities and Exchange Commission and the stock
exchanges proposed new regulations and rules to strengthen audit
committees.
Board Committees as per Companies Act 2013
Audit
Stakeholders
Relationship
Committee
Board Committees
Nomination and
Remuneration
Committee
Corporate Social
Responsibility
Committee
7
Chapter II
Practices Around the Globe
I. Under Companies Act, 2013
A. Audit Committee (Section 177)
(1) The Board of Directors of every listed public company and such other
class or classes of companies, as may be prescribed, shall constitute
an Audit Committee.
Rule 6 of The Companies (Meetings of Board and its Powers)
Rules, 2014read with Rule 4 of The Companies (Appointment and
Qualifications of Directors) Rules, 2014 prescribes that the Board of
directors of every listed public company and the following classes of
companies shall constitute an Audit Committee of the Board:
i) All public companies with a paid up capital of ten crore rupees or
more;
ii) All public companies having turnover of one hundred crore
rupees or more;
iii) All public companies, having in aggregate, outstanding loans,
debentures or deposits exceeding fifty crore rupees or more.
Explanation.-- For the purposes of this rule, it is here by clarified that,
the paid up share capital or turnover or outstanding loans, debentures
and deposits, as the case may be, as existing on the last date of latest
audited financial statements shall be taken into account.
(2) The Audit Committee shall consist of a minimum of three directors with
independent directors forming a majority:
Provided that majority of members of Audit Committee including its
Chairperson shall be persons with ability to read and understand, the
financial statement.
(3) 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 sub-section (2).
Practices Around the Globe
(4) Every Audit Committee shall act in accordance with the terms of
reference specified in writing by the Board which shall, inter
alia, include,--
(i) the recommendation for appointment, remuneration and terms of
appointment of auditors of the company;
(ii) review and monitor the auditor's independence and performance,
and effectiveness of audit process;
(iii) examination of the financial statement and the auditors' report
thereon;
(iv) approval 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 proposed to be entered into by the
company subject to such conditions as may be prescribed;
Provided further that in case of transaction, other than
transactions referred to in section 188, and where Audit
Committee does not approve the transaction, it shall make its
recommendations to the Board:
Provided also that in case any transaction involving any amount
not exceeding one crore rupees is entered into by a director or
officer of the company without obtaining the approval of the Audit
Committee and it is not ratified by the Audit Committee within
three months from the date of the transaction, such transaction
shall be voidable at the option of the Audit Committee and if the
transaction is with the related party to any director or is
authorised by any other director, the director concerned shall
indemnify the company against any loss incurred by it:
Provided also that the provisions of this clause shall not apply to
a transaction, other than a transaction referred to in section 188,
between a holding company and its wholly owned subsidiary
company.
(v) scrutiny of inter-corporate loans and investments;
(vi) valuation of undertakings or assets of the company, wherever it
is necessary;
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Technical Guide on Functioning Audit Committee & Its Review Checklist
(vii) evaluation of internal financial controls and risk management
systems;
(viii) monitoring the end use of funds raised through public offers and
related matters.
(5) 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 of financial statement before their
submission to the Board and may also discuss any related issues with
the internal and statutory auditors and the management of the
company.
(6) The Audit Committee shall have authority to investigate into any
matter in relation to the items specified in sub-section (4) or referred
to it by the Board and for this purpose shall have power to obtain
professional advice from external sources and have full access to
information contained in the records of the company.
(7) The auditors of a company and the key managerial personnel 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.
(8) The Board's report under sub-section (3) of section 134 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 therefor.
(9) Every listed company or such class or classes of companies, as may
be prescribed, shall establish a vigil mechanism for directors and
employees to report genuine concerns in such manner as may be
prescribed.
(10) The vigil mechanism under sub-section (9) shall provide for adequate
safeguards against victimization of persons who use such mechanism
and make provision for direct access to the chairperson of the Audit
Committee in appropriate or exceptional cases:
Provided that the details of establishment of such mechanism shall be
disclosed by the company on its website, if any, and in the Board's
report.
10
Practices Around the Globe
B. Appointment of Auditors (Section 139)
(11) Where a company is required to constitute an Audit Committee under
section 177, all appointments, including the filling of a casual vacancy
of an auditor under this section shall be made after taking into account
the recommendations of such committee.
C. Powers and duties of auditors and auditing
standards (Section 143)
(12) Notwithstanding anything contained in this section, if an auditor of a
company in the course of the performance of his duties as auditor, has
reason to believe that an offence of fraud involving such amount or
amounts as may be prescribed, is being or has been committed in the
company by its officers or employees, the auditor shall report the
matter to the Central Government within such time and in such
manner as may be prescribed:
Provided that in case of a fraud involving lesser than the specified
amount 1 , the auditor shall report the matter to the audit committee
constituted under section 177 or to the Board in other cases within
such time and in such manner as may be prescribed:
Provided further that the companies, whose auditors have reported
frauds under this sub-section to the audit committee or the Board but
not reported to the Central Government, shall disclose the details
about such frauds in the Board`s report in such manner as may be
prescribed.
D. Rule 13(4) of The Companies (Audit and Auditors)
Rules, 2014
The following details of each of the fraud reported to the Audit
Committee or the Board under sub-rule (3) during the year shall be
1 Rule 13 of The Companies (Audit and Auditors) Rules, 2014 prescribes that for frauds
involving amount lesser than Rs. 1 crore, the auditor shall report the matter to the Audit
Committee or to the Board immediately but not later than two days of his knowledge of
the fraud and he shall report the matter specifying the following:-
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.
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Technical Guide on Functioning Audit Committee & Its Review Checklist
disclosed in the Board's Report:-
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken
E. Auditor not to render certain services (Section
144(1))
An auditor appointed under this Act shall provide to the company only
such other services as are approved by the Board of Directors or the
audit committee, as the case may be, but which shall not include any
of the following services (whether such services are rendered directly
or indirectly to the company), or its holding company or subsidiary
company, namely:--
(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services; (f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and
(i) any other kind of services as may be prescribed:
Provided that an auditor or audit firm who or which has been
performing any non-audit services on or before the commencement of
this Act shall comply with the provisions of this section before the
closure of the first financial year after the date of such
commencement.
F. Valuation by registered valuers (Section 247(1))
Where a valuation is required to be made in respect of any property,
stocks, shares, debentures, securities or goodwill or any other assets
(herein referred to as the assets) or net worth of a company or its
12
Practices Around the Globe
liabilities under the provision of this Act, it shall be valued by a person
having such qualifications and experience and registered as a valuer
in such manner, on such terms and conditions as may be prescribed
and appointed by the audit committee or in its absence by the Board
of Directors of that company.
II. Provisions of SEBI Act and its Directions
Securities and Exchange Board of India (Listing Obligations and Disclosure
Requirements) Regulations, 2015 amended from time to time.
A. Regulation No 18 Chapter IV
(1) Every listed entity shall constitute a qualified and independent audit
committee in accordance with the terms of reference, subject to the
following:
(a) The audit committee shall have minimum three directors as
members.
(b) Two-thirds of the members of audit committee shall be
independent directors.
(c) All members of audit committee shall be financially literate and
at least one member shall have accounting or related financial
management expertise.
Explanation (1).-For the purpose of this regulation, financially
literate d
and shal he basic
understand
l m ean t abii
lt o r
yt ea
financial statements i.e. balance sheet, profit and loss account,
and statement of cash flows.
Explanation (2).-For the purpose of this regulation , a member
shall be considered to have accounting or related financial
management expertise if he or she possesses experience in
finance or accounting, or requisite professional certification in
accounting, or any other comparable experience or background
which results in the individual`s financial sophistication,
including being or having been a chief executive officer, chief
financial officer or other senior officer with financial oversight
responsibilities.
(d) The chairperson of the audit committee shall be an independent
director and he shall be present at Annual general meeting to
answer shareholder queries.
13
Technical Guide on Functioning Audit Committee & Its Review Checklist
(e) The Company Secretary shall act as the secretary to the audit
committee.
(f) The audit committee at its discretion shall invite the finance
director or head of the finance function, head of internal audit
and a representative of the statutory auditor and any other such
executives to be present at the meetings of the committee:
Provided that occasionally the audit committee may meet
without the presence of any executives of the listed entity.
(2) The listed entity shall conduct the meetings of the audit committee in
the following manner:
(a) The audit committee shall meet at least four times in a year and
not more than one hundred and twenty days shall elapse
between two meetings.
(b) The quorum for audit committee meeting shall either be two
members or one third of the members of the audit committee,
whichever is greater, with at least two independent directors.
(c) The audit committee shall have powers to investigate any
activity within its terms of reference, seek information from any
employee, obtain outside legal or other professional advice and
secure attendance of outsiders with relevant expertise, if it
considers necessary.
(3) The role of the audit committee and the information to be reviewed by
the audit committee shall be as specified in Part C of Schedule II.
Part C: Role of the Audit Committee and Review of Information by Audit
Committee (See Regulation 18(3))
A. The role of the audit committee shall include the following:
(1) oversight of the listed entity`s financial reporting process and the
disclosure of its financial information to ensure that the financial
statement is correct, sufficient and credible;
(2) recommendation for appointment, remuneration and terms of
appointment of auditors of the listed entity;
(3) approval of payment to statutory auditors for any other services
rendered by the statutory auditors;
14
Practices Around the Globe
(4) reviewing, with the management, the annual financial statements and
auditor's report thereon before submission to the board for approval,
with particular reference to:
(a) matters required to be included in the director`s responsibility
statement to be included in the board`s report in terms of clause
(c) of sub-section (3) of Section 134 of the Companies Act,
2013;
(b) changes, if any, in accounting policies and practices and
reasons for the same;
(c) major accounting entries involving estimates based on the
exercise of judgment by management;
(d) significant adjustments made in the financial statements arising
out of audit findings;
(e) compliance with listing and other legal requirements relating to
financial statements;
(f) disclosure of any related party transactions;
(g) modified opinion(s) in the draft audit report;
(5) reviewing, with the management, the quarterly financial statements
before submission to the board for approval;
(6) reviewing, with the management, the statement of uses / application of
funds raised through an issue (public issue, rights issue, preferential
issue, etc.), 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 utilisation of
proceeds of a public or rights issue, and making appropriate
recommendations to the board to take up steps in this matter;
(7) reviewing and monitoring the auditor`s independence and
performance, and effectiveness of audit process;
(8) approval or any subsequent modification of transactions of the listed
entity with related parties;
(9) scrutiny of inter-corporate loans and investments;
(10) valuation of undertakings or assets of the listed entity, wherever it is
necessary;
15
Technical Guide on Functioning Audit Committee & Its Review Checklist
(11) evaluation of internal financial controls and risk management systems;
(12) reviewing, with the management, performance of statutory and internal
auditors, adequacy of the internal control systems;
(13) 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;
(14) discussion with internal auditors of any significant findings and follow
up there on;
(15) 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;
(16) discussion 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;
(17) to look into the reasons for substantial defaults in the payment to the
depositors, debenture holders, shareholders (in case of non-payment
of declared dividends) and creditors;
(18) to review the functioning of the whistle blower mechanism;
(19) approval of appointment of chief financial officer after assessing the
qualifications, experience and background, etc. of the candidate;
(20) carrying out any other function as is mentioned in the terms of
reference of the audit committee;
(21) reviewing the utilization of loans and/ or advances from/investment by
the holding company in the subsidiary exceeding rupees 100 crore or
10% of the asset size of the subsidiary, whichever is lower including
existing loans / advances / investments existing as on the date of
coming into force of this provision. 2
2 Inserted by way of SEBI'S notification dated May 9, 2018 w.e.f. April 1, 2019.
16
Practices Around the Globe
B. The audit committee shall mandatorily review the
following information:
(1) management discussion and analysis of financial condition and results
of operations;
(2) statement of significant related party transactions (as defined by the
audit committee), submitted by management;
(3) management letters / letters of internal control weaknesses issued by
the statutory auditors;
(4) internal audit reports relating to internal control weaknesses; and
(5) the appointment, removal and terms of remuneration of the chief
internal auditor shall be subject to review by the audit committee.
(6) statement of deviations:
(a) quarterly statement of deviation(s) including report of
monitoring agency, if applicable, submitted to stock
exchange(s) in terms of Regulation 32(1).
(b) annual statement of funds utilized for purposes other than those
stated in the offer document/prospectus/notice in terms of
Regulation 32(7).
Clause 10(h) of Schedule V- Annual Report
Where the board had not accepted any recommendation of any committee of
the board which is mandatorily required, in the relevant financial year, the
same to be disclosed along with reasons thereof:
Provided that the clause shall only apply where recommendation of /
submission by the committee is required for the approval of the Board of
Directors and shall not apply where prior approval of the relevant committee
is required for undertaking any transaction under these Regulations.
RBI Master Directions
Para 68 of Chapter IV - Constitution of Committees of the Board (Master
Direction - Non-Banking Financial Company - Systemically Important
Non-Deposit taking Company and Deposit taking Company (Reserve
Bank) Directions, 2016)
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Technical Guide on Functioning Audit Committee & Its Review Checklist
(1) Audit Committee
(i) All applicable NBFCs shall constitute an Audit Committee, consisting
of not less than three members of its Board of Directors.
Explanation I: The Audit Committee constituted by an applicable
NBFC as required under section 177 of the Companies Act, 2013 shall
be the Audit Committee for the purposes of this paragraph.
Explanation II: The Audit Committee constituted under this paragraph
shall have the same powers, functions and duties as laid down in
section 177 of the Companies Act, 2013.
(ii) The Audit Committee must ensure that an Information System Audit of
the internal systems and processes is conducted at least once in two
years to assess operational risks faced by the applicable NBFCs.
II. Provisions of Sarbanes Oxley Act
The provisions of the Sarbanes Oxley Act, 2002 are applicable to those
Indian companies which have issued securities in US markets either directly
or through ADRs/GDRs as there is no specific exemption to non-US
companies. Similarly Indian subsidiary companies of US listed companies
shall also have to comply with the provisions of the Act in full. In terms of the
provisions of "SAS 70 Reports on the Process of Transactions by Service
Organisations", BPO industry in India shall be required to comply with the
provision relating with internal control as mentioned in section 404 of the Act.
By section 301, the Act has amended Section 10A of the Securities
Exchange Act, 1934 which require issuer to comply with standards relating to
audit committee. The section requires that the Audit committee members
shall be independent directors and shall not accept any consultancy,
advisory or other compensatory fee from the issuer. He shall not be a
affiliated person of the issuer or its subsidiaries. The audit Committees shall
be required to establish procedure for:
-- receipt, retention, treatment of complaints received by the issuer
regarding accounting, internal accounting control and audit matters
-- the confidential, anonymous submission by the employees regarding
questionable accounting and auditing matters
Section 302 of the Act deals with corporate responsibility for financial reports
18
Practices Around the Globe
and related Rules require CEOs and CFOs to certify financial and other
information in their companies' quarterly and annual reports.
Section 304 of the Act requires management to return bonuses or profit from
stock sales received with in twelve months of a restatement resulting from
material non-compliance with financial reporting requirements as a result of
misconduct.
The audit committee is specifically charged with the duty of overseeing the
financial reporting process of a company. The duties of an audit committee
include reviewing the financial statements, making recommendations on the
appointment or removal of statutory auditors of the company, review of
internal control systems of the company etc.
19
Chapter III
Requirement of an Audit Committee
Requirements of an Audit Committee should include the followings:
To foster an environment of open and transparent communication
with the auditors
The audit committee should meet with the auditors at least twice each
year for at least 45 to 60 minutes. One meeting should discuss the
proposed audit plan to address areas of financial reporting and
internal control risk and the second should cover the results of the
completed audit. The first step of auditor engagement should be
characterized by an open communication. Hence the auditor may put
forth his points and plan of action pertaining to audit such as:
· enquiry regarding any risks which the audit committee is aware
of or suspects;
· the expectation of the audit committee regarding the extent to
which it expects the auditor to interact with the internal audit
team;
· the various assumptions which the auditor will be making in
finalizing the financial statements particularly given the current /
recent changes in financial reporting landscape (shift from
accounting standards to Ind AS);
· how, when and at what intervals would the auditor like to
interact with the audit committee or any of its member in light of
any significant findings;
· any significant difficulties the auditor faced during previous audit
tenure and review of the extent to which these difficulties have
been addressed.
The audit committee on its part can put forth the following points to the
auditor:
· understand the methodology which the auditor plans to adopt
including the time frame and the team strength;
Requirement of an Audit Committee
· discuss the management's perception of various risks including
any contingency risks;
· explain the basis of any significant accounting decision made
during the year to which only the internal auditor has been privy
to;
· explain the management's understanding and the changes it
adopted to ensure smooth transitioning or seamless adoption of
change in regulatory landscape;
· assure the auditor that it will strive to clear any query /
clarification required during the period of audit and decide on a
single point of contact;
· any deficiency in the methodology of audit which the committee
has identified and the manner in which it may be rectified;
· extent of reliance on and testing of internal controls over financial
reporting.
Robust interaction in the spirit of candor
The "quality" of the balance sheet.
To find out the extent to which audited financial statements are
affected by management's accounting estimates and judgments, and
where those estimates and judgments fall on a scale from
conservative to aggressive.
The "quality" of annual earnings.
To find out the extent to which the current year's operating earnings
reflect error corrections, estimate adjustments, or one-time
transactions that may distort actual performance for the year.
The nature and magnitude of significant yearend accounting
adjustments made just before or during the audit.
Large year-end adjustments may indicate that monthly financial
information provided to the board is unreliable.
The system of internal controls.
Most independent financial audits only check on internal control
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Technical Guide on Functioning Audit Committee & Its Review Checklist
processes to the extent necessary to understand how they are
intended to work and to design other complementary audit tests not to
fully verity internal controls.
For example, to see if the process of recording revenues and
receivables is following generally accepted accounting principles and
the hospital's own policies, an external auditor might take a sample of
as few as 20 patients out of thousands during the year to see if all
services in the medical record were processed properly.
Such small samples may be sufficient for purposes of the financial
statement audit, but they don't answer the question, "Do we always
properly will for all the services we provide, and only for the services
we provide? The answer to that question requires a more thorough
study, often conducted by an internal auditor. The audit committee
needs to know exactly what internal control tests were and were not
performed so that it doesn't derive unwarranted assurance from the
limited internal control testing performed by the independent auditors.
To enable the independent auditor to be able to communicate
directly with the audit committee regarding any issue or concern
that may arise in the course of its work.
To ensure that the management has established an effective
process for maintaining adequate internal controls and
procedures for accurate financial reporting.
22
Chapter IV
Duties of Audit Committee
An Audit Committee works under the authority of the Board of Directors.
The general purpose of the Committee is to assist the Board of Directors in
overseeing issues relating to the development and management of financial
and accounting information.
The Committee is responsible for monitoring
(i) the process of evolving the financial information,
(ii) the effectiveness of internal control as well as the risk management
system,
(iii) the auditing of annual account statements and consolidation thereof
as carried out by the external auditors, and the independence of such
external auditors.
Communication Flow
The Committee should at all times:
· Ensure an effective and independent internal audit function which
Technical Guide on Functioning Audit Committee & Its Review Checklist
works to provide assurance regarding the adequacy and operation of
internal controls and processes intended to safeguard the Company's
assets, effective and efficient use of the Company's resources and,
timely and accurate recording of all transactions
· Meet the independent auditor at the end of each quarter and financial
year to discuss key observations relating to the financial statement for
the relevant period.
· Provide an independent channel of communication for the Chief
Compliance Officer, internal auditor and the independent auditor.
· Invite members of the management, and at its discretion, external
experts in legal, financial and technical matters, to provide advice and
guidance.
· Provide periodic feedback and reports to the Board.
· Meet at least four times in a financial year or as specified under any
other regulation.
· Periodically review its own charter, structure, processes and
membership.
· Review the risks which the company is exposed to including the
management's perception regarding looming risk.
· Ensure that a whistle blower is provided an easy channel to report any
fraud or anomaly and assure complete confidentiality during the course of
investigation, if any.
24
Chapter V
Role of the Audit Committee
The audit committee is a central pillar of effective corporate governance and
is in the best position to offer effective oversight of the performance,
independence and objectivity of the auditor and the quality of the audit. The
audit committee's role is also something we believe can be built upon.
But unlike some proposals now being considered that would enforce
mandatory auditor changes, we propose the introduction of a periodic
comprehensive review of auditor performance and quality of the audit by the
audit committee.
Such a review, if undertaken at least every five years, would allow the audit
committee to:
· Analyse changes over time which are not readily apparent from year
to year, such as any impacts linked to tenure or cyclical events.
· Consider future requirements over the medium to long term and any
changes to its policies and procedures to increase its own
effectiveness.
· More clearly demonstrate the effectiveness and value of its oversight
of the selection, independence, performance and quality of the audit
and the auditor to shareholders and other stakeholders.
· Select or retain the audit firm it believes is most appropriate for the
company.
· Develop greater knowledge and insight about the audit and the
auditor.
· Give consideration to a broader range of approaches to meet their
responsibilities.
Periodic review is a more appropriate and effective approach than measures
such as mandatory change which we believe would undermine the audit
committee's role by limiting its freedom to decide which audit firm best meets
the company's and shareholders' needs which, in turn would restrict the
committee's ability to offer good governance.
Technical Guide on Functioning Audit Committee & Its Review Checklist
In this Point of View, we take a deeper look at the benefits of a periodic
review and how it should be considered as part of a wider `package' of
changes that we have proposed in previous PoV papers, including:
· Ensuring strong, independent national regulators of the profession.
· Enhancing transparency about the audit and the auditors.
· Restricting those non-audit services that could impair an auditor's
independence.
26
Chapter VI
Effectiveness of Audit Committees
Without a strong detailed written charter, an audit committee may fail to
recognize the position when and where. It should predetermine the skill set
and specialized experience, the audit committee members should
mandatorily possess to achieve its goals. The charter should specify
frequency of meetings, the nature and frequency of communication with the
organization's senior managers, as well as its auditors. It must record the
various powers and authorities a committee must possess, independent of
the organization's senior management. The audit committee must have the
freedom to obtain any information required to assess the adherence to rules,
regulations and the organization's values. Although a report may not be
required by organizations but it is a good practice for a committee to prepare
one.
1. To create and adhere to a written charter identifying its functions,
authority and responsibilities including the skills and experience its
members must possess to discharge duties and function effectively.
2. To specify success factors as competencies audit committee members
must possess for the committee to discharge its duties and function
effectively.
3. To identify core values that reflect those of the organization and
establish written procedures fostering open communications, dispute
resolutions and active participation by all committee members.
4. To reserve the right of inviting group or individual to any audit
committee meeting.
5. To ensure that all members participate actively in setting the
committee agenda.
6. To formulate a decision-making processes and procedures to resolve
deadlocks.
7. To review the previous meeting's items at each subsequent meeting.
8. To summarize the meeting at the end.
Technical Guide on Functioning Audit Committee & Its Review Checklist
The audit committee is looked upon as a distinct culture for corporate
governance and excellence and has received recently wide publicity
and growing awareness so as to make a meaningful contribution to the
process of corporate governance.
Composition
Section 177 of the Companies Act 2013 provides that every public company
having paid up capital of not less than five crores of rupees shall constitute a
committee of the Board known as "Audit committee" which shall consist of
not less than three directors and such number of other directors as the Board
may determine of which two third shall be directors other than managing or
whole time directors.
The members of the Audit Committee shall elect a chairman from amongst
themselves. The auditors, the internal auditor, if any, and the director-in-
charge of finance shall attend and participate at meetings of the Audit
committee but shall not have the right to vote.
However, the provisions regarding composition of an audit committee as
prescribed in SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 are different.
In terms of Regulation 18 of SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015:
(i) The Audit Committee shall have minimum three directors as members
out of which twothirds of the members shall be independent
directors.
(ii) All members of Audit Committee shall be financial literate and at least
one member shall have accounting or related financial management
expertise.
(iii) The Chairperson of the Audit Committee shall be an independent
director and shall be present at Annual General Meeting to answer
shareholder queries.
(iv) 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.
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Effectiveness of Audit Committees
(v) The Company Secretary shall act as the Secretary to the Committee.
Brainstorm
· Does the nominating and governance committee maintain a matrix
that incorporates the skills and attributes needed on the audit
committee?
· Does the audit committee periodically assess its composition to
confirm its members collectively have the skills and experience (e.g.,
industry, business, leadership) needed to fulfill the committees'
duties? Are any gaps discussed with the nominating and governance
committee chairman?
· When assessing committee composition, does the committee consider
attributes such as diversity, tenure, and experience?
· Do the audit committee members meet the requirements for financial
expertise and financial literacy?
· Are training and education programs available to help audit committee
members maintain their financial knowledge?
29
Chapter VII
Specimen Audit Committee Charter
The charter governs the operations of the Audit Committee and is subject to
review by the Board of Directors at such interval as may be deemed
necessary. The Committee on its part will review the charter at least once in a
year and make recommendations to the Board, if any, for amending the charter.
The members of the Audit Committee are expected to peruse and
understand the contents of the charter and ensure that the same is followed
in letter and in spirit.
Purpose and Authority
The Audit Committee is established by and among the Board of Directors to
provide a structured assistance to the Board in discharging its duties towards
its shareholders, potential shareholders and other stakeholders in respect of:
(1) Ensuring integrity of reporting by examining and reviewing the
financial statements;
(2) Protect the interest of minority shareholders by reviewing related party
transactions;
(3) Evaluate internal control systems over financial statements;
(4) Identify possible risks which the company is exposed to and work in
tandem with the Board any related committee to mitigate such risks;
(5) Performance of audit function i.e. of external and internal auditors and
scrutiny of the non-audit function discharged by the external auditor;
(6) Ensure compliance with legal and regulatory requirements on matters
of financial reporting, end-use application of funds borrowed or
advances made by company.
The function of the Audit Committee is not independent of the Board and its
recommendations are not binding on the Board. Hence where the Board is in
disagreement with the recommendation of the Committee then the same
must be recorded in writing and suitably disclosed.
Composition and Meetings
The Audit Committee shall consist of minimum of three directors and two-
Specimen Audit Committee Charter
thirds of whom shall be independent directors. All members shall be
financially literate and at least one member shall have accounting or related
financial management expertise. The chairperson of the audit committee
shall be an independent director and he shall be present at Annual General
Meeting to answer shareholder queries. The Company Secretary shall act as
the secretary to the audit committee. The Audit Committee shall meet as
many number of times and at such frequencies as the situation may warrant
provided that under no circumstances shall the number of meetings be less
than four in a year and the time lapse between two meetings should not be
more than one hundred and twenty days.
Where necessary, the Audit Committee may request the presence of the
auditor or any executive of the company or any outside expert on matters
concerning it.
Role and responsibilities
In carrying out its role and responsibilities, the Audit Committee should
ensure that it remains flexible in order to best react to changing conditions
and circumstances.
The role and responsibilities of the Audit Committee shall include the
following:
Relating to Financial Statements-
(1) Overseeing the Company's financial reporting process and disclosure
of its financial information to ensure that the financial statements are
true, fair, sufficient and credible.
(2) Discuss and review, with the management and auditors, the annual /
quarterly financial statements before submission to the Board, with
particular reference to:
(i) Matters required to be included in the Directors Responsibility
Statement to be included in the Board's Report in terms of sub-
section (2) of section 164 of the Companies Act, 2013;
(ii) Any changes in accounting policies and practices and reasons
for the same;
(iii) Major accounting entries involving estimates based on exercise
of judgment by management;
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Technical Guide on Functioning Audit Committee & Its Review Checklist
(iv) Analysis of the effects of alternative GAAP methods on the
financial statements;
(v) Draft audit report and qualifications, if any, therein;
(vi) Significant adjustments made in the financial statements arising
out of audit findings;
(vii) Compliance with listing and other legal requirements relating to
financial statements;
(viii) Disclosure of any related party transaction;
(ix) Disclosure of contingent liabilities;
(x) The effect of regulatory and accounting initiatives as well as off-
balance-sheet structures, on the financial statements;
(xi) Company's earnings press releases, as well as financial
information and earnings guidance, if any, provided to analysts
and rating agencies;
(xii) Review the statement for uses/applications of funds by major
category on a quarterly basis, with the financial results and
annually the statement of funds utilized for purposes other than
as mentioned in the offer document / prospectus / notice. Such
review shall be conducted till the full money raised through the
issue has been fully spent.
(xiii) Scrutinize inter corporate loans and investments.
(xiv) Discussion with internal auditors of any significant findings and
follow up there on
(xv) Appointment of CFO (i.e., the whole-time Finance Director or
any other person heading the finance function or discharging
that function) after assessing the qualifications, experience &
background, etc. of the candidate
Appraisal of Internal Control Systems
The most important role of audit committee is to appraise the internal control
system and look into its adequacy. In this process, it would
(1) Scrutiny of inter-corporate loans and investments;
32
Specimen Audit Committee Charter
(2) reviewing, with the management, performance of statutory and internal
auditors, adequacy of the internal control systems;
(3) Oversight the company's financial reporting process and the
disclosure of its financial information to ensure that the financial
statement is correct, sufficient and credible.
(4) Discussion 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.
Whistle Blowing/ Vigil Mechanism
The Committee shall review the Company's arrangements for its directors
and employees to raise concerns, about possible wrong doings in financial
reporting, accounting, auditing or other related matters.
The mechanism shall provide adequate safeguards against victimization of
persons who use such mechanism and make provision for direct access to
the Chairman of the Audit Committee in appropriate or exceptional cases.
The Committee shall ensure that these arrangements allow independent
investigation of such matters and appropriate follow up action. In case of any
conflict of interest, the Committee Members would disassociate from such
investigation.
Business Risk Assessment
The Audit Committee should evaluate the adequacy of the risk management
system of the Company. To obtain reasonable assurance with respect to the
Company's risk management practices, the Audit Committee should
periodically review:
(i) the nature and extent of the risks facing the company, the industry and
the economy as a whole;
(ii) the extent and categories of risk which it regards as acceptable for the
company to bear;
(iii) the likelihood of the risks concerned materializing;
(iv) the company's ability to reduce the risks that do materialise;
(v) the costs of operating particular controls relative to the benefit thereby
obtained in managing the related risks;
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Technical Guide on Functioning Audit Committee & Its Review Checklist
(vi) consider the risk of management's ability to overlook / override the
internal control systems;
(vii) review with the Company's legal head and solicitors about the various
legal matters which may an impact on the financial statements and
functioning of the Company and
(viii) Discuss with the management, the Company's policies with respect to
risk assessment and risk management, including appropriate
guidelines to govern the process, as well as the Company's major
financial risk exposures including policy for foreign exchange and
derivative transactions and the steps management has undertaken to
control them.
It is the role of management to implement board policies on risk and control.
In fulfilling its responsibilities, management should identify and evaluate the
risks faced by the company for consideration by the board and design,
operate and monitor a suitable system of internal control which implements
the policies adopted by the board.
Insider Trading
Insider trading is the illegal practice of trading on the stock exchange to one's
own advantage through having access to confidential information.
The Audit Committee shall take adequate steps and approve policies in
relation to the implementation of the Code of Conduct for Prevention of
Insider Trading and Code of Corporate Disclosure Practices and to supervise
implementation of the Code.
Compliance with regulatory requirements and Policies
Keeping a check on the compliance with regulatory requirements is another
important responsibility of the Audit Committee
The Committee shall actively participate and take charge of the following:
S. Particulars Yes/No
No.
1 Review the effectiveness of the
system for monitoring compliance
with laws and regulations and the
results of management's investigation
34
Specimen Audit Committee Charter
and follow-up (including disciplinary
action) of any instances of non-
compliance
2 Review the findings of any
examinations by regulatory agencies,
and any auditor observations.
3 Review the process of communicating
the Code of Conduct to employees
and the mechanism for its adherence
4 Review the report of the Monitoring
Agency appointed by the Company,
to monitor the utilization of proceeds
of such public / rights issue and make
appropriate recommendations to the
Board.
5 Obtain regular updates from
management and company legal
counsel regarding compliance
matters.
6 Review the valuation of undertakings
or assets of the Company, wherever it
is necessary.
7 Review the system of storage and
retrieval, display or printout of books
of accounts maintained in electronic
mode during the required period
under law.
Appointment/Removal of Statutory Auditors
The audit committee would recommend to the Board of directors, the
appointment, reappointment and if required, the replacement or removal of
the statutory auditors of the company.
It would also recommend the Board regarding the fixing of audit fees.
For that purpose it would review, with the management, performance of the
statutory auditors.
Though regarding audit fees, the audit Committee shall recommend the same
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Technical Guide on Functioning Audit Committee & Its Review Checklist
to the board but payment to statutory auditors for any other services,
rendered by them, has to be approved by it.
While considering such appointment, the Committee shall consider:
(i) Whether the qualifications and experience of the auditors is
commensurate with the size and requirements of the Company;
(ii) If any order or pending proceeding relating to professional matters of
conduct against the proposed auditor before the Institute of Chartered
Accountants of India or any competent authority or any Court.
The Committee may call for other information from the proposed Auditors as
it deems fit.
Appointment of Cost Auditor
The audit committee would recommend to the Board of directors, the
appointment, reappointment and if required removal of cost auditors of the
company.
It would also recommend the Board regarding the fixing of audit fees, nature
and scope of cost audit and also approve rendering of any other services by
the cost auditors and fees pertaining thereto.
For that purpose it would review, with the management, performance of the
cost auditors.
The Committee shall ensure that:
(1) Cost Auditors are independent and have an arm's length relationship
with the Company;
(2) The Cost Auditors are not disqualified at the time of their appointment
or during their tenure.
Arm's length relationship is ensured that the Cost Auditors, appointed under
sub-section (3) of Section 148 of the Companies Act, 2013, shall not provide
any other services to the Company relating to
(i) design and implementation of cost accounting system; or
(ii) the maintenance of cost accounting records, or
(iii) act as internal auditor, whether acting individually, or through the
same firm or through other group firms where he or any partner has
any common interest.
36
Specimen Audit Committee Charter
Appointment/Removal of Internal Auditors
The Audit Committee shall review on a regular basis:
(1) the adequacy of internal audit function, including the internal audit
charter,
(2) the structure of the internal audit department,
(3) approval of the audit plan and its execution, staffing and seniority of
the official heading the department, reporting structure, budget,
coverage and frequency of internal audit.
It shall play an active role in the appointment, removal, performance and
terms of remuneration of the Chief Internal Auditor.
The Committee shall also consider the following aspects:
(1) Review the regular internal reports to management prepared by the
internal audit department, as well as management's response thereto;
(2) Review 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;
(3) Review 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.
The Audit Committee should also ensure that the audit teams are adequately
staffed.
Interaction with Cost Auditors
The audit committee shall have discussion with the Cost auditors with regard
to their findings and follow up thereon.
It shall Review and recommend the Cost Audit Report to the Board.
Interaction with Internal Auditors
The Audit committee shall have discussion with internal auditors with regard
to significant findings in the internal audit carried out and follow up thereon.
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Technical Guide on Functioning Audit Committee & Its Review Checklist
It would review internal audit reports relating to internal control weaknesses.
It would also review the finding of any internal investigations by the internal
auditors into matters where there is suspected fraud or irregularity or a
failure of internal control system of a material nature.
Interaction with Statutory Auditors
The Audit Committee shall discuss with the statutory auditor before the audit
commences, the nature and scope of audit. The Committee should also ensure
after discussion with the management and the statutory auditor that adherence to
the accounting standards does not just mean mere acceptability but
understanding of the spirit of the same and ensure quality.
On completion of audit, the Committee should facilitate another round of
discussion between the auditor and management to understand any area of
concern. The Audit Committee should ensure that any concern so raised should
be understood and addressed. Necessary process for report back regarding
progress in resolving such area of concern should be ensured by the Committee.
Subsidiary Company Oversight
The Audit Committee shall review the financial statements, in particular, the
investments made by the unlisted subsidiary companies;
The appointment, compensation, overseeing of the auditors work etc., for
each subsidiary company shall be the responsibility of the Audit Committee
of the respective subsidiaries. However the Audit Committee of the Company
shall satisfy itself regarding the effectiveness of the process of appointment.
A working procedure to be evolved, which facilitates dual oversight/
compliance;
The Audit Committee shall review the utilization of loans and/ or advances
from/investment by the holding company in the subsidiary exceeding rupees
100 crore or 10% of the asset size of the subsidiary, whichever is lower
including existing loans / advances / investments existing as on the date of
coming into force of this provision.
The following functions for each subsidiary company will be performed /
reviewed by the Audit Committee of the respective subsidiary company and
that of the Company:
(a) In regard to Statutory Audit:
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Specimen Audit Committee Charter
(i) Appointment of the auditors
(ii) Fixation of remuneration of the auditors
(iii) Pre-approval of all services
(iv) Compliance regarding "prohibited service , as defined in the
said Policy
(v) Review / oversight of the work done by the auditors.
(b) In regard to Internal Audit:
(i) Review the adequacy of structure and function of the Internal
Audit, status of audit plan and its execution.
(ii) Review key Internal Audit observations along with management
response thereto.
(iii) Review the status on compliance with the Tata Code of
Conduct (concern resolution mechanism), risk management
and the control environment.
Related Party Transaction
The Audit committee shall review the statement of significant related party
transactions submitted by the management, including the significant
criteria/thresholds decided by the management;
The following details shall be placed periodically before the Audit Committee
to oversee the potential conflict of interest situation:
(1) A statement in summary form of transactions with related parties in
the ordinary course of business;
(2) Details of material individual transactions with related parties which
are not in the normal course of business;
(3) Details of material individual transactions with related parties or
others, which are not on arm's length basis, together with
management's justification for the same;
(4) Approval of all or any subsequent modification of transactions with
related parties;
(5) Summary of transactions for which omnibus approval has been
granted.
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Technical Guide on Functioning Audit Committee & Its Review Checklist
The Audit Committee is not bound to approve all related party transactions.
Under such circumstances it shall make recommendations to the Board along
with justification / reason for its disapproval / non-consideration of the item.
Fraud
The Audit Committee shall be responsible for handling frauds involving such
amounts as the Board may decide. It shall periodically review with the senior
management the various anti-fraud measures and controls implemented. The
Audit Committee shall also suitably follow-up / lay down report back
procedures for frauds which have been brought to its attention. It shall also
ensure that proper action is taken against perpetrators of fraud.
Reporting to the Board of Directors
The audit committee shall submit to the Board:
(a) Annual financial statement after reviewing the same with the
management
(b) Quarterly financial statement after reviewing the same with the
management
(c) Management discussion and analysis of financial condition and results
of operations after its review
(d) Findings of any internal investigations by the internal auditors into the
matters where there is suspected fraud or a failure of internal control
system of a material nature after its review.
(e) the appointment, re-appointment, replacement or removal of the
statutory auditors and fixation of their fee.
(f) the appointment, removal and terms of remuneration of the chief
Internal auditor after review
The Annual Report of the Company shall disclose the composition of the
Audit Committee, brief description of the scope of the Audit Committee
Charter, names of members, Chairperson, meetings and attendance.
40
Chapter VIII
Specimen Checklist for Performance
Evaluation of Audit Committee
(please rate on a scale of 1 to 5 with 1 being Poor and 5 being Excellent)
I. Composition, procedures
1. The Audit Committee is adequately constituted as
per applicable law
2. All the members of the Committee are financially
literate
3. At least one member shall have accounting or
related financial management expertise
4. The charter of the Committee clearly lays down the
role and responsibilities of the Committee
specifically including the following:
i. reviewing integrity of financial statements and
announcement;
ii. internal financial controls;
iii. risk management systems;
iv. effectiveness of internal audit;
v. conduct of audit and performance of external
auditor;
vi. review and examination of non-audit services;
vii. making recommendations on internal and
external auditor's appointment, remuneration
and terms of engagement
viii. Whistle-blower mechanism
5. The number of audit committee meetings is
sufficient to meet the role and responsibilities as
per the Charter
6. Only the Audit Committee members receive
automatic invitation to the meetings
7. The Audit Committee can request the presence of
Technical Guide on Functioning Audit Committee & Its Review Checklist
any auditor / executive of the company seek outside
legal or other professional advice and secure
attendance of outsiders with relevant expertise
8. The Audit Committee engages with the auditors on
a regular basis
9. The Audit Committee ensures that the audit team is
sufficiently staffed
10. The internal auditor reports back to the Committee in
a timely manner regarding its findings
11. The Audit Committee is periodically updated with
recent statutory changes and also with the
management decisions on important matters
12. The minutes (draft and / or final) are well drafted
and clearly record the proceedings of the meeting.
13. The minutes are circulated within time and changes
if any suggested by the members are incorporated
14. The Audit Committee reviews its charter at least
once in a year and recommends any amendments
to the Board
15. A system of report back by the Board / Committee
exists for recommendations made by the Committee
16. The Committee reviews its own performance once in
a year
II. Degree of fulfillment of key responsibilities
1. The committee effectively performs the
responsibilities as outlined in the charter.
2. The mandate of the committee is sufficient in
addressing the objectives for which it was set up by
the Board.
3. The charter is reviewed at least once in year by the
Board
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Specimen Checklist for Performance Evaluation of Audit Committee
4. Reviews and understands the scope of control
testing by internal and external auditors
5. The Committee is apprised regarding any notice
received from regulatory authority which is of
significance and of management's reply to the same
6. The Committee reviews areas concerning
management's assumptions, significant accounting
treatments that have a material impact on the financial
statements
III. Effectiveness of meetings
1. The frequency of committee meetings is adequate
2. The agenda discussed in the meetings is clear and
realistic in terms of number and nature of items to
be covered
3. The agenda along with detailed note is provided
well before the date of meeting to allow the
members to understand the matters to be
discussed in the Meeting.
4. Time allotted for every meeting is adequate to
cover most of the agenda items
5. Sufficient time is allotted between Audit Committee
and Board Meetings to prepare for ay work arising
out of Committee Meeting and present to the Board
6. Information provided for the meeting is adequate,
timely and presented in a way that facilitates
productive discussion (i.e. material is relevant with
the right amount of detail and is "reader-friendly").
7. Sufficient time is spent in discussing critical issues/
issues of strategic importance.
8. The committee does not wander into unwanted
minutiae or tangents while discussing agenda
items.
9. Appropriate balance is maintained in analyzing the
past, discussing current issues and planning for
future.
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Technical Guide on Functioning Audit Committee & Its Review Checklist
10. Discussions/ decisions made in the meeting show a
large degree of alignment with the overall company
strategy.
11. There is an effective system for monitoring and
driving closure of critical post meeting actions/
decisions.
12. Incidence of physical meetings rather than conduct
of items through circulation resolution.
13. Incidence of interference of Board / management on
delegated matters
IV. Committee dynamics
1. All members have clarity of their role and
responsibilities.
2. All members feel free to speak their mind and
contribute effectively on key issues.
3. There is cohesiveness in the overall working of the
committee.
4. There is adequate dialogue and participation from
members on critical issues/ issues of strategic
importance.
5. Conflict/ differences of opinion between members
are managed constructively.
6. Members are respectful to each other.
7. The management arranges for satisfactory orientation
of new member(s)
8. The management arranges for continuous training of
existing members at satisfactory intervals
V. Quality of relationship of the committee with
the Board and the management
1. There is clarity between the Board, management
and committee with respect to the role played by
the committees.
2. There is good coordination and cohesiveness in the
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Specimen Checklist for Performance Evaluation of Audit Committee
working of the Board, management and the
committees.
3. The recommendations of the Audit Committee are
adequately discussed in the Board and where
required clarity is sought from the members.
4. Committee members are accessible to senior
management employees.
5. Adequate opportunities are availed by the
committee to be exposed to the company's
management and to understand the company's
products and operations.
6. The Board and the management show a high
degree of responsiveness/ acceptance of the
guidance/ direction provided by the committee.
7. The Chairman of the Audit Committee engages with
the management of the Company on a periodic
basis to understand the management's point of
view on critical issues.
8. Where the management provides any quarterly /
annual / periodic statements, the same is reviewed by
the Committee
9. The Committee is apprised of the risks, whether
existing or envisaged faced by the Company and the
steps taken / intended to be taken by the
management to counter them
10. The Board's appraisal of the performance of the
Committee is reported back on areas where the
Committee is found lacking
Comments
45
Chapter IX
Frequently Asked Questions on Audit
Committee
1. How shall a listed entity conduct the meetings of the Audit
Committee?
Section 177 of the Companies Act, 2013 does not mandate any specific
number of meetings to be held by the Audit Committee. In sub-section (5)
there is reference of periodical discussions with auditors and review of
financial statements before submission to the Board.
Clause 18 of SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 provides that the audit committee shall meet at
least four times in a year and not more than one hundred and twenty
days shall elapse between two meetings.
2. What is the mandatory requirement towards attendance of
independent directors in forming quorum of the Audit Committee
meetings as per SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015?
The quorum for Audit Committee meeting shall either be 2 members
or 1/3rd of the members of the Audit Committee, whichever is greater,
with at least 2 Independent Directors.
3. Why do Companies need an Audit Committee when a Board of
Directors already exists to oversee all its affairs?
Considering the sizes, complexities and increasing Regulatory
requirements of business, it is not possible for the Board to focus on
all aspects of the company. A specialist Committee of the Board is
better suited to look after critical areas as a case of delegation of
duties, an example of which is the Audit Committee.
Broadly, the role of Audit Committee is to oversee the financial
reporting process, internal control structure and the management of
risks of the company. However, in recent times the role of the Audit
Committee has increased manifold. This ranges from recommending
Frequently Asked Questions on Audit Committee
the appointment of auditors to scrutiny of inter-corporate loans and
investments. Hence the role of Audit Committee is no longer limited to
that of overseeing the financial statements finalization process. In
some countries, Audit Committees also oversee legal and ethical
conduct of the company's management and its employees.
The Committee should carry out its functions without getting involved
in operation issues. The Committee members should view their
responsibilities in this perspective.
7. How important is the Orientation and Continuing Education of
Members?
A newly appointed member of Audit Committee needs proper
orientation to help him become an active member. A copy of the Audit
Committee Charter, a Compendium of legal provisions, stock
exchange requirements, latest audited accounts, copy of the last
internal audit presentation to the Committee and other related reports
can prove useful in the orientation process. Introductory meetings with
CEO, CFO, Head of Internal Audit and Statutory Auditors could also
be organized. A person who is new to the Board may also require
introduction to the company's operations and risks.
Ongoing education of members can be achieved by arranging for
updates of Audit Committee members on statute changes, new
accounting standards and practices, changes in the company's risk
profile, and other relevant matters.
8. Why Independence of Audit Committee Members is a requisite
qualification?
Independence of the Directors on Audit Committee is a requirement
for ensuring the effectiveness functioning of the committee. The
committee has to take an objective and unbiased view of all matters
under consideration. A member of the Committee who has close links
with the promoters or the senior management may not, on all
occasions, take such a view. Hence, the Committee must consist of
majority of independent directors. This is because the roles and
responsibilities of the Audit Committee are such that it requires the
active participation of a member of the management to keep the Audit
Committee informed about the thinking of the management. Despite a
member being independent, there may be instances of a perceived
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Technical Guide on Functioning Audit Committee & Its Review Checklist
loss of independence or conflict of interest. Such situations may be
considered and resolved by the Audit Committee or the Board on a
case to case basis. A one- off situation may be resolved by the
concerned director abstaining from the proceedings while the
Committee considers the particular matter. A continuing loss of
independence or conflict of interest may justify the director leaving the
committee.
9. What are the Impediments to Audit Committee Effectiveness?
Many corporate accounting scandals in USA and elsewhere have
shown that even Audit Committees which appeared to be well
organized at times fail to be effective. Many reasons can be attributed
to this, important among them are:
· The Board and Audit Committee members view the Committee
only as a legal or regulatory requirement to be fulfilled.
· Inadequate understanding among Committee members of
accounting, control, audit, reporting and complex business
issues.
· Too much trust in the company's management and lack of
inquisitiveness and healthy scepticism
· Committee's inability to assert itself in the face of dominant
management.
· Lack of effective leadership leading to consequent lack of
coordination with auditors and management.
· Time constraints
· Ineffective meetings ridden with poor agenda planning and
unfocussed discussions
From the above, it may be seen that success or failure of an Audit
Committee lies solely in the hands of its members.
10. Who is to decide whether an Audit Committee is discharging its
responsibilities well?
One of the possibilities is an objective assessment of its performance
by the Committee itself done on an annual basis.
An Audit Committee undertakes a number of responsibilities
48
Frequently Asked Questions on Audit Committee
throughout the year. It may be a good idea for the Committee to spend
some time once in a year to reflect on intended and actual
achievements of the previous year. The Self Review could cover the
following:
· Skill set of the Committee- analysis of desirable vis-à-vis
available
· Dealings of the Committee in each area of its responsibility
during the year: analysis of involvement, performance, gaps
· Relationship of the Committee with external auditors, top
management and internal auditors
· Improvements or changes initiated by the Committee in any
area under its responsibility and the degree of success
achieved.
Additionally, the Companies Act, 2013 requires the Board of certain
companies to evaluate the performance of its committees. The
challenge lies in ensuring that such performance evaluations do not
become a mere perfunctory exercise.
11. What does the term financially literate mean?
The Companies Act 2013 does not define the term `financially literate'.
However, Section 177 of the Act provides that majority of members of
Audit Committee including its Chairperson shall be persons with ability
to read and understand, the financial statement.
According to Explanation to Regulation 18(1) of the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015,
financially literate shall mean the ability to read and understand basic
financial statements i.e. balance sheet, profit and loss account, and
statement of cash flows. Given that one of the primary functions of
Audit Committee is to review and ensure integrity of the financial
statements of the Company, it is pertinent that the members of the
Audit Committee are sufficiently capable of understanding the financial
statements and its repercussions. Going by the definition it is clear
that the members need not necessarily be financial or accounting
professional. However it is important that the members understand the
process of auditing and possess an in-depth understanding of financial
statements.
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Technical Guide on Functioning Audit Committee & Its Review Checklist
12. What does the term `have accounting or related financial
management expertise' mean in Regulation 18 of SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015?
According to Explanation (2) of Regulation 18 of SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015, a
member shall be considered to have accounting or related financial
management expertise if he or she possesses experience in finance
or accounting, or requisite professional certification in accounting, or
any other comparable experience or background which results in the
individual's financial sophistication, including being or having been a
chief executive officer, chief financial officer or other senior officer with
financial oversight responsibilities.
13. If a company intends to constitute its Audit Committee with 5
members, then how many such members should be independent?
Regulation 18 of SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015 requires two-thirds of the members
of the Audit Committee to be independent directors. Hence given 5
members, 3 members of the Audit Committee should be independent
(the fraction being less than .50 is ignored).
14. Is the recommendation of Audit Committee binding on the Board
of the Company?
Neither the Companies Act, 2013 nor SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015 are clear regarding this
point. The Parliamentary Standing Committee in its 64th Report
refused to agree with the rationale provided by the Government that
the Audit Committee was supreme to the Board and hence its
recommendations were binding on the Board. The aforestated
Committee instead stated that if the Board of Directors do not agree
with the Audit Committee then the reasons for disagreement in writing
should be intimated to the shareholders, be reported in the Annual
General Meeting with the final authority being with the shareholders.
This point has been incorporated in the amended SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015 by way
of SEBI's notification dated May 9, 2018 which states that where the
Board does not accept the recommendation of any committee which is
mandatorily required, the same should be disclosed in the Annual
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Frequently Asked Questions on Audit Committee
Report of that relevant financial year. The reasoning behind the same
is also understandable. The Audit Committee is necessarily is sub-set
of the Board. Hence it cannot have sweeping powers over the Board.
It is necessary to understand that the strength of the Board will be
larger than the Audit Committee and hence the conclusions will be a
result of more informed and resourceful discussions.
15. Does the audit committee have to seek permission of the Board
to invite any outsider with relevant expertise?
This depends on the charter of the Audit Committee. If the charter
provides a free hand to the Audit Committee to invite an outsider with
relevant expertise, then it can go ahead to do so. However the Board
has power to include sufficient fetters in this regard in the Audit
Committee charter. As regards regulatory requirement, Regulation
18(2)(c) of SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 states that the Audit Committee shall have the
powers to investigate any activity within its terms of reference and can
secure attendance of outsiders with relevant expertise. However, it is
understood that the powers of the Audit Committee is under the
overall tutelage of the Board of Directors.
16. Is the recommendation of Audit Committee binding on any other
committee?
The reason behind delegation of powers of Board to other committees
is to reduce the burden over the Board. It is also important to note that
the delegation should not be done in a way that either any overlapping
of terms of reference happens or delegation happens in a non-uniform
way. With a clear charter for every committee, the above problems
can be mitigated. Ideally the decision or recommendation of any
committee should not be binding on any other committee. This will
give sweeping powers to a committee while reducing the other
committee to a mere puppet. Such a scenario is not desirable and
should be avoided.
17. Can the Audit Committee sub-delegate its authority?
The Act, 2013 or SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015 is silent regarding this. Hence one
needs to refer to the charter of the Audit Committee in this regard.
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Technical Guide on Functioning Audit Committee & Its Review Checklist
18. If any member of the Company resigns from the Audit Committee,
what will be the process and timeline for appointment of a new
member?
The Companies Act, 2013 or SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015 do not state any timeline for
appointment of a new member for any Committee. The above query
gives rise to the following scenarios:
(i) If the member who has resigned is a non-executive member/
executive member/ independent director but the constitution is
not affected under such circumstances the Board may take a
call if it wants to fill the casual vacancy in the Audit Committee.
(ii) If the member who has resigned is a non-executive / executive
member but the constitution of the Audit Committee is not as
per SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 or the charter herein again the following
two scenarios arise:
1. If with the resignation of the member, the constitution of
the Board is not affected then any other non-executive
member can be appointed by the Board as a member of
the Committee.
2. If with the resignation of the member, the constitution of
the Board is affected then the Board should
immediately take steps to appoint another non-executive /
executive director with the dual purpose of completing the
constitution of the Board and filling the vacancy in the
Committee.
(iii) If the member who has resigned is an independent director but
the constitution of the Committee is affected herein the
following two scenarios arise:
1. If with the resignation of the independent director, the
constitution of the Board is not affected then any other
independent director can be appointed by the Board as a
member of the Committee.
2. If with the resignation of the member, the constitution of
the Board is affected as per Regulation 25(6) of SEBI
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Frequently Asked Questions on Audit Committee
(Listing Obligations and Disclosure Requirements)
Regulations, 2015, a new independent director should be
appointed by listed entity at the earliest but not later than
the immediate next meeting of the board of directors or
three months from the date of such vacancy, whichever is
later.
19. Given the above query, can the Audit Committee allow a non-
independent director to function as a member to fill the casual
vacancy?
This depends on the constitution of the Audit Committee. As per
Section 177 of the Act and SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015, two-thirds of the Committee should
consist of independent directors. If this requirement is fulfilled, then a
non-independent director can be appointed as a member to fill the
casual vacancy. If the above requirement is not met, then the Board
necessarily has to appoint an independent director as member of the
Audit Committee.
20. Does the Audit Committee compulsorily have to induct a member
as recommended by the Board?
Since the Board is the over-arching authority, the power of appointing
a member in the Audit Committee lies with it. However if the
Committee has reservations about any new member, then the same
can be conveyed to the Board.
21. Can the Audit Committee conduct its own diligence before
admitting a new member?
No provision restricts the Audit Committee from conducting its own
diligence before admission of a new member. However it is assumed
that the Board is sufficiently capable of appreciating the importance of
an Audit Committee and hence will take an appropriate decision
regarding appointment of a member to the Audit Committee.
53
SCHEDULE IV
[See section 149(8)]
CODE FOR INDEPENDENT DIRECTORS
(Amended as on 15th October, 2018)
The Code is a guide to professional conduct for independent directors.
Adherence to these standards by independent directors and fulfilment of their
responsibilities in a professional and faithful manner will promote confidence
of the investment community, particularly minority shareholders, regulators
and companies in the institution of independent directors.
I. Guidelines of professional conduct
An independent director shall:
(1) uphold ethical standards of integrity and probity;
(2) act objectively and constructively while exercising his duties;
(3) exercise his responsibilities in a bona fide manner in the interest of the
company;
(4) devote sufficient time and attention to his professional obligations for
informed and balanced decision making;
(5) not allow any extraneous considerations that will vitiate his exercise of
objective independent judgment in the paramount interest of the
company as a whole, while concurring in or dissenting from the
collective judgment of the Board in its decision making;
(6) not abuse his position to the detriment of the company or its
shareholders or for the purpose of gaining direct or indirect personal
advantage or advantage for any associated person;
(7) refrain from any action that would lead to loss of his independence;
(8) where circumstances arise which make an independent director lose
his independence, the independent director must immediately inform
the Board accordingly;
(9) assist the company in implementing the best corporate governance
practices.
Schedule IV : Code for Independent Directors
II. Role and functions
The independent directors shall:
(1) help in bringing an independent judgment to bear on the Board's
deliberations especially on issues of strategy, performance, risk
management, resources, key appointments and standards of conduct;
(2) bring an objective view in the evaluation of the performance of board
and management;
(3) scrutinise the performance of management in meeting agreed goals
and objectives and monitor the reporting of performance;
(4) satisfy themselves on the integrity of financial information and that
financial controls and the systems of risk management are robust and
defensible;
(5) safeguard the interests of all stakeholders, particularly the minority
shareholders;
(6) balance the conflicting interest of the stakeholders;
(7) determine appropriate levels of remuneration of executive directors,
key managerial personnel and senior management and have a prime
role in appointing and where necessary recommend removal of
executive directors, key managerial personnel and senior
management;
(8) moderate and arbitrate in the interest of the company as a whole, in
situations of conflict between management and shareholder's interest.
III. Duties
The independent directors shall--
(1) undertake appropriate induction and regularly update and refresh their
skills, knowledge and familiarity with the company;
(2) seek appropriate clarification or amplification of information and, where
necessary, take and follow appropriate professional advice and
opinion of outside experts at the expense of the company;
(3) strive to attend all meetings of the Board of Directors and of the Board
committees of which he is a member;
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Technical Guide on Functioning Audit Committee & Its Review Checklist
(4) participate constructively and actively in the committees of the Board
in which they are chairpersons or members;
(5) strive to attend the general meetings of the company;
(6) where they have concerns about the running of the company or a
proposed action, ensure that these are addressed by the Board and, to
the extent that they are not resolved, insist that their concerns are
recorded in the minutes of the Board meeting;
(7) keep themselves well informed about the company and the external
environment in which it operates;
(8) not to unfairly obstruct the functioning of an otherwise proper Board or
committee of the Board;
(9) pay sufficient attention and ensure that adequate deliberations are
held before approving related party transactions and assure
themselves that the same are in the interest of the company;
(10) ascertain and ensure that the company has an adequate and
functional vigil mechanism and to ensure that the interests of a person
who uses such mechanism are not prejudicially affected on account of
such use;
(11) report concerns about unethical behaviour, actual or suspected fraud
or violation of the company's code of conduct or ethics policy;
(12) act within their authority, assist in protecting the legitimate interests of
the company, shareholders and its employees;
(13) not disclose confidential information, including commercial secrets,
technologies, advertising and sales promotion plans, unpublished price
sensitive information, unless such disclosure is expressly approved by
the Board or required by law.
IV. Manner of appointment
(1) Appointment process of independent directors shall be independent of
the company management; while selecting independent directors the
Board shall ensure that there is appropriate balance of skills,
experience and knowledge in the Board so as to enable the Board to
discharge its functions and duties effectively.
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Schedule IV : Code for Independent Directors
(2) The appointment of independent director(s) of the company shall be
approved at the meeting of the shareholders.
(3) The explanatory statement attached to the notice of the meeting for
approving the appointment of independent director shall include a
statement that in the opinion of the Board, the independent director
proposed to be appointed fulfils the conditions specified in the Act and
the rules made thereunder and that the proposed director is
independent of the management.
(4) The appointment of independent directors shall be formalized through
a letter of appointment, which shall set out:
(a) the term of appointment;
(b) the expectation of the Board from the appointed director; the
Board-level committee(s) in which the director is expected to
serve and its tasks;
(c) the fiduciary duties that come with such an appointment along
with accompanying liabilities;
(d) provision for Directors and Officers (D and O) insurance, if any;
(e) the Code of Business Ethics that the company expects its
directors and employees to follow;
(f) the list of actions that a director should not do while functioning
as such in the company; and
(g) the remuneration, mentioning periodic fees, reimbursement of
expenses for participation in the Boards and other meetings and
profit related commission, if any.
(5) The terms and conditions of appointment of independent directors
shall be open for inspection at the registered office of the company by
any member during normal business hours.
(6) The terms and conditions of appointment of independent directors
shall also be posted on the company's website.
V. Reappointment
The re-appointment of independent director shall be on the basis of report of
performance evaluation.
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Technical Guide on Functioning Audit Committee & Its Review Checklist
VI. Resignation or removal
(1) The resignation or removal of an independent director shall be in the
same manner as is provided in sections 168 and 169 of the Act.
(2) An independent director who resigns or is removed from the Board of
the company shall be replaced by a new independent director within a
period of three months from the date of such resignation or removal,
as the case may be.
(3) Where the company fulfils the requirement of independent directors in
its Board even without filling the vacancy created by such resignation
or removal, as the case may be, the requirement of replacement by a
new independent director shall not apply.
VII. Separate meetings
(1) The independent directors of the company shall hold at least one
meeting in a financial year, without the attendance of non-independent
directors and members of management;
(2) All the independent directors of the company shall strive to be present
at such meeting;
(3) The meeting shall:
(a) review the performance of non-independent directors and the
Board as a whole;
(b) review the performance of the Chairperson of the company, taking
into account the views of executive directors and non-executive
directors;
(c) assess the quality, quantity and timeliness of flow of information
between the company management and the Board that is
necessary for the Board to effectively and reasonably perform
their duties.
VIII. Evaluation Mechanism
(1) The performance evaluation of independent directors shall be done by
the entire Board of Directors, excluding the director being evaluated.
(2) On the basis of the report of performance evaluation, it shall be
determined whether to extend or continue the term of appointment of
the independent director.
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Schedule IV : Code for Independent Directors
Note: The provisions of sub-paragraph (2) and (7) of paragraph II'
paragraph IV, paragraph V' clauses (a) and (b) of sub-paragraph (3) of
paragraph VII and paragraph VIII shatl not apply in the case of a
Government company as defined under clause (45) of section 2 of the
Companies Act, 2013 (18 of 2013), if the requirements in respect of
matters specified in these paragraphs are specified by the concerned
Ministries or Departments of the Central Government or as the case
may be' the State Governments and such requirements are complied
with by the Government companies."
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