SEBI mandates an Audit committee for AMCs of Mutual Funds

Prabhat Nigam

13 Sep, 2022

SEBI has released a circular on Audit Committee of Asset Management Companies on 9^th February, 2022 which mandates the Asset Management Companies (AMCs) of Mutual Funds to mandatorily constitute an Audit Committee. The circular also lists down the role, responsibilities, membership and other features of the committee to be constituted for such AMCs. The mandate of this circular shall come into force from 1^st August, 2022.

What is an Audit Committee of an AMC?

The Audit Committee of an AMC is responsible for the oversight of financial reporting process, company’s system of internal controls, audit process, compliance to laws and regulations and other related processes with regards to the Mutual Fund business.

Role of the Audit Committee

Following is the role of the Audit Committee that is created for the purpose of AMCs:

• To ensure that the rectifications that have been pointed out by the internal as well as external auditors is acted upon.
• To review the financial reporting processes, audit processes and the system of Internal Controls for the Mutual Fund operations of the AMCs.

Responsibilities and Powers of Audit Committee

Financial Reporting

• The Committee has to maintain an oversight on the Mutual Fund Schemes’ and financial reporting process.
• The Committee shall consider and recommend for the approval of AMC Board, all the accounting and policy issues for the schemes and the AMC. It includes any proposed changes to the accounting policies and practices for the transactions with the related parties etc.
• The Committee shall review the opinion issued by the statutory auditor.
• The Committee shall also recommend and consider to the AMC board, adoption of the financial statements including the half yearly unaudited financial results that are prepared for the scheme and the financial statements of the AMC.
• And any other relevant matters.

Audit (both Internal and External) and Internal Controls

• To consider and recommend for approval, appointment, re-appointment and if required then removal of statutory auditor and Internal Auditor of the Mutual Fund, and the fixation of fees for audit and any other services which have been rendered by the Statutory Auditors with respect to the Mutual Fund.
• To review the scope of Internal Auditors and recommending for the approval of the Board of AMCs.

• To review the Reports of Internal Audit of the Schemes of the Mutual Fund (including the reviewing of Internal Audit Report of critical activities that have been outsourced by the AMC such as the Registrar and Transfer Agent Activity, Custodian, Fund Accounting etc.)
• Discuss with the internal and statutory auditors on any significant findings and start following up from there on.
• To review the findings of investigations conducted by the internal auditors of the AMC where fraud is suspected, or any irregularity or failure of the internal control systems which are of a material nature or such issues which have been raised, highlighted or referred through whistle blower complaints etc.
• To review regulatory Inspection reports.
• To review the implementation status of all the outstanding action points that arises from Internal Audit Reports, Statutory Audit Reports, Inspection Reports, Systems Audit Reports etc.
• To review the adequacy of the internal control systems, to seek comments of the internal control systems, to define metrics for the measuring of internal controls etc and also includes the steps taken in improving the effectiveness of the Internal Control Systems including through automation.
• To interact with internal and statutory auditors of the Mutual Fund, minimum once annually without the participation of the management of AMC. Apart from the abovementioned mandatory requirement, such interaction must be held whenever felt necessary by the independent directors of the Committee.
• The Audit Committee of the AMC must interact with the Audit Committee of the Trustees at least once in a year.

Membership of Audit Committee

• The Committee of the AMC should have a minimum of 3 directors as members.
• The Committee should have at least two-thirds of its members as independent directors of AMC. If the two-thirds number results in a fraction, then higher number after rounding up shall be considered.
• The appointment of the members of the Committee shall be done by the Board of Directors of the AMC.
• Every member of the Committee should be able to read and understand financial statements with at least one of the members having a background in finance and accounts.
• The chairperson the Committee shall be an independent director having adequate experience in the areas of accounts and finance.

Meetings of Audit Committee

• The chairperson of the Committee is responsible for calling the meetings as and when required. The Committee shall have at least four meetings in a financial year and not more than one hundred and twenty days should have elapsed between two consecutive meetings.
• The quorum of the Committee should be either two members or one-third of the members whichever is higher among the two having at least two independent directors. And in case one-third of the strength results into fraction, then a higher number after round up shall be considered in case of quorum.

Reporting of Audit Committee

• It is the duty of the internal auditor to submit its report to the Committees along with the board of directors of the AMCs.
• The Audit Committee of the AMC shall then forward their observations on internal audit, if any, to the Trustees.

Conclusion

SEBI^[1] said that the decision to have mandatory Audit Committee for Asset Management Companies of the Mutual Funds was taken after recommendations were taken from the Mutual Fund Advisory Committee along with the feedback received from the industry. Having done that, SEBI has come out with a detailed framework of role, responsibility, membership, reporting and other features of the Audit Committee of the AMC of Mutual Funds.