Audit Committee under Companies Act, 2013 & SEBI (LODR) Regulations, 2015

Prabhat Nigam

02 Apr, 2022

The composition and role of Audit Committee has been provided under the Companies Act 2013 and SEBI (LODR) Regulations, 2015. Audit committee in a company plays a crucial role in the internal financial control and helps in the risk management. Hence its constitution is an integral part for any company. This article examines the different facets of audit committee under Companies Act 2013 as well as SEBI (LODR) Regulations 2015.

Provision of Audit Committee under Companies Act 2013 and SEBI (LODR) Regulations 2015

The provisions relating to Audit Committee have been provided under Section 177 of Companies Act, 2013 & under Rule 6-Companies (Meetings of Board & its Powers) Rules, 2014. Under SEBI (LODR) Regulation, 2015, the provisions of Audit Committee are subject to Regulation 18 & Part C of Schedule II of SEBI (LODR) Regulation, 2015.

Composition of Audit Committee under Companies Act and SEBI (LODR) Regulations 2015

Under the provisions of Companies Act 2013, the audit committee must comprise of at least 3 directors, with independent directors forming majority. Such members must be appointed for the audit committee under companies act who can read and understand financial statements. This provisions is also applicable while appointing a chairperson.

Under the provisions of SEBI (LODR) Regulations 2015, the audit committee must comprise of at least 3 directors as members. Further, two-thirds of the members of the audit committee should be independent directors. The chairperson of the audit committee must be an independent director. All the audit committee members should be literate financially, and minimum one member should be expert in accounting or related financial management.

Meetings to be held by audit committee

Companies Act 2013 doesn’t mandate for an audit committee meeting frequently. Nevertheless, Audit Committee should meet as often as required subject to requirement as may be prescribed under law.

The SEBI (LODR) Regulations 2015 requires audit committee to meet minimum 4 times in a year, and more than 120 days should not have elapsed between two meetings. The quorum for such meeting shall be of 2 members or 1/3 of the members of the audit committee, whichever is greater, with a minimum of 2 independent directors.

Functions and Role of Audit Committee

As per Section 177(4) of the Companies Act, every audit committee needs to adhere to the terms of reference mentioned in writing by the board which will include:

• The recommendation for appointment, remuneration & terms of appointment of the company’s auditors;
• Review & monitor the independence & performance of auditor as well as the effectiveness of the audit process;
• Examine the financial statement and the auditors’ report;
• Approval or modification of company’s transactions with related parties. The audit committee can make omnibus approval for related party transactions that has been proposed to be entered into by a company subject to conditions prescribed under Rule 6A of the Companies (Meetings of Board & its Powers) Rules, 2014.

Part C Schedule II of SEBI (LODR) Regulations prescribes the role of Audit Committee. It includes the following:

• Oversight of the listed entity’s financial reporting process and the disclosure of its financial information to ensure the credibility and the authenticity of it;
• Recommend appointment, remuneration and terms of appointment of listed entity’s auditors;
• Providing payment approval to statutory auditors for services rendered by the statutory auditors;
• To review the annual financial statements and auditors’ report before it is submitted to the board for approval with a special reference to the following:

1. Matters to be included in the directors’ responsibility statement;
2. Changes in accounting policies & practices and reasons, if any;
3. Major accounting entries;
4. Significant adjustments made in the financial statement from audit findings;
5. Adherence to the listing and other legal requirements pertaining to financial statements;
6. Disclosure of RPTs;
7. Modified opinion in the draft audit report.

• To review quarterly financial statements before it is submitted to the board for approval;
• To define material modifications & disclose it as a part of the policy on materiality of RPTs and on dealing with RPTs;
• Approval from the listed entity’s audit committee is needed for a RPT to which the subsidiary of listed entity is a party but where the listed entity is not a party, if the value of the transaction during the financial year exceeds 10% of the annual consolidated turnover according to the last audited financial statements of the listed entity;
• To review the statement of the usage of funds raised through an issue, the statement of funds used for various purposes other than those specified in the offer document/prospectus/notice and making recommendations to the board to take steps in this regard;
• Review & monitor the independence and performance of the auditor and effectiveness of the audit;
• Approve or subsequent modification of transactions between listed entity and related parties;
• Review inter-corporate loans and investments;
• Valuation of undertaking or assets of the listed entity, where required; evaluating internal financial controls and risk management systems;
• To review performance of statutory and internal auditors, adequacy of the internal control systems;
• To review the adequacy of internal audit function, entailing the structure of the internal audit department, staffing and seniority of the person heading the department, coverage of reporting structure and frequency of internal audit;
• Conduct discussion with internal auditors of any significant findings;
• To review the findings of any internal investigations conducted by the internal auditors on frauds or irregularity or a failure of internal control system and report such matter to the board;
• To discuss about the nature and the scope of audit with statutory auditors before the audit is done;
• To analyse the cause behind substantial defaults in the payment to depositors, debenture holders, shareholders and creditors;
• To analyse the functioning of the whistle blower mechanism;
• To approve the appointment of CFO after assessing the qualifications of the applicant;
• Performing any other function as provided under the terms of reference of the audit committee;
• To review the usage of loans and/or advances from/investment by the holding company in a subsidiary exceeding 100 crore rupees or 10% of the asset size of the subsidiary, whichever is lower, including existing loans/advances/investments.

Power of the audit committee

The audit committee has the following powers under Companies Act 2013:

• To call for the comments of auditors regarding internal control systems, scope of audit and review financial statement before it is submitted to the board and can also discuss any issues related with the internal as well as statutory auditors and the management of the company;
• To investigate into a matter relating to Company and the committee can obtain professional advice from external sources. The committee has the power to access information in the records of the company.

The audit committee has the following powers under SEBI (LODR) Regulations 2015:

• To investigate an activity within its terms of reference;
• To get information from any employee;
• To get legal or other professional advice from outside;
• To get attendance of outsiders having relevant expertise, if required.

Conclusion

The constitution of Audit Committee is required to be in compliance with the requirements of Section 177 of the Companies Act- 2013^[1], read along with Regulation 18 of SEBI Listing Obligations and Disclosure Requirements 2015. Its constitution is essential as the Audit Committee of a Company has the responsibility of supervising the Company’s internal controls & financial reporting process.

Read our Article:SEBI mandates an Audit committee for AMCs of Mutual Funds