This article has been written by Ms. Parag Awadhiya, a third-year student at Balaji Law college, Pune. 

Abstract – 

The functioning and formation of audit committees Depends on various crucial aspects. The audit committees are responsible for ensuring the corporate governance and the transparency in companies through the financial lens. The world of corporate governance revolves around the faith rather than the force. And incorporates the proper balance between the performance and conformance. The corporate governments basically focus on creating an environment full of trust and confidence.  The audit committee helps and plays a crucial role in the independence of the audit process. In today’s world of corporations, the operation of these parties is a complex process Strategy provisions.  That especially requires rules and guidelines while making the final financial statement.  Audit committees are formed in India by the Statutory provisions, which describes the criteria that is related to independence, composition, and qualification of the members. These requirements help in ensuring the quality of the members that are chosen from the management side and help in proving that they are qualified for the role. 

 

INTRODUCTION–

In the field of corporate governance, the realm of audit committees’ functions as the guardians being indispensable for the financial integrity providing transparency and creating a greater impact over the process of financial reporting and potential of taking risk for the company. From the contexts of India, the corporate governance is regularly evolving that is enhancing the confidence of investors thus helping in better formation and functioning of audit committees. In India the establishment of the audit committees is not just a normal talk of the markets but it is mandatory by the law especially for the companies which are registered and some other functioning bodies. The audit comedies work in a very critical manner that seeks to independently handle the financial statements and manage the internal controls. This helps in making the trust among the investors, stakeholders, regulators and the public. Moreover, in recent times India has seen a significant and drastic development in the field of corporate governance in their practices and regulatory frameworks. It’s a big task for the audit committees how they will adapt these evolving nature and environment around them for meeting the demands they are asked for. 

Under section 177 the audit committee has been defined under the Indian laws that as per the board of directors and other classes of companies can be said and shall constitute an audit committee.  The audit committee must consist of at least three directors minimum with one independent director for the majority.  The majority member of the audit committee shall be the chairperson who has the ability to read and understand the statements related to financial terms. All the audit committee shall behave in accordance with the terms of reference inter alia, consists of 

1- Appointment by the recommendation, so for the remuneration and specified terms for auditors’ appointment of the company. 

2- The auditors’ independence and performance is to be reviewed and monitored and also the effectiveness of the process of audit. 

3- to examine the financial statement and report of auditors they are on.

 

Formation and Functions –

The formation of an audit committee as per the companies bill 2009 and the SEBI act is deemed mandatory for the listed companies. According to the companies bill every listed company is required to have an audit committee. Some of the important norms to be followed while creating in audit committee as per the SEBI are as follows- 

1. There must be at least three directors as the chairman of its members. 
2. Out of the total number at least two third members of the audit committee must have independent directors. 
3. Every member of the audit committee must be knowledgeable in the field of financial aspects. Also, one member should have the expertise in accounting management. 
4. The audit committee’s chairman must be there at annual general meetings for the purpose of handling and answering the queries of shareholders. 
5. When the committee is organising the meeting the audit committee can invite the executive as they think is appropriate. These invites incorporate the financial director, one representative audit of the statutory body and an internal audit. 
6. The company secretary has to take up the role of being the audit committee secretary. 

Powers – 

Under the clause 49 II C of the listing agreement, the audit committee comprises of the following powers- 

• Any activity can be investigated which is under the domain and scope of its reference.
• Any employee can be asked are can be searched for information. 
• The professional or legal advisory can be obtained from the outside. 
• Also, the attendance of the outsiders is to be secured with the expertise of the related field. 
• These powers are illustrative and not exhaustive. 

 

Mandatory review of information by the committee– 

As per the clause 49 II E, the audit committee needs to mandatory review the following information- 

• The discussion related to the management and the financial condition analysis for the company and the result of all these operations. 
• The statement of transactions by the audit committee and submitted by the management
• Letters related to the internal control and management weaknesses as per the statutory auditors of the committee. 
• Reports that can corporates the internal audits which can be related to the internal control weaknesses. 

 

Under Indian law, audit committee functions include:

Concurring to Indian company law, the audit committees are authorised to transmit out a numeral of necessary duties that support integrity, honesty, and efficient control of financial reporting processes. Various legislature regulations, regulatory commands, and corporate governance standards define these roles. Conferring to Indian legislation, audit committees’ key accountabilities comprise the following:

• Supervision of Financial Reporting: Maintaining a watch on the financial reporting practise is one of the foremost duties of audit committees. In command to guarantee accuracy, totality, and conformism with relevant accounting values and regulatory obligations, this entails inspecting and examining financial statements.

 

• Surveillance of Internal Controls and Risk Managing: Audit committees are accountable for evaluating the suitability and effectiveness of the organization’s internal power framework and risk controlling processes. 

 

• Assessment of Audit Procedures: Audit committees are necessary to the management of the external audit process. They are in charge of creating recommendations about the selection, reimbursement, and circumstances of employment of external auditors. They also check the audit’s freedom and efficiency by going over the plan, verdicts, and scope.

 

• Compliance Oversight: Examination committees keep a judgement on how good the business obeys with applicable laws, rules, and corporate governance recommendations. They control the handling of legal and monitoring issues, assess obedience program effectiveness, and examine reports relating to legal and regulatory obedience.

 

• Monitoring of Whistle-blower Mechanisms: Audit committees are regularly in charge of supervising the company’s whistle-blower or vigil contrivances. They promise the confidentiality and efficacy of the procedure for reporting subjects like dishonesty, fraud, or misconduct in the company.

 

• Review of Related Party Transactions: In command to promise justice, honesty, and obedience to authorised necessities, audit committees inspect and indorse related party transactions. They assess the appropriateness of the evidence revealed in financial statements and business filings about these types of transactions.

 

• Monitoring Internal Audit Function: The freedom, neutrality, and efficacy of the internal audit task are underneath the authority of audit committees. They build indisputable circumstances that internal and external auditors are corresponding, assess how satisfactory inner audit recommendations are being executed, and inspect internal audit reports.

 

• Review of Financial Policies and Procedures: The company’s accounting system processes, financial plans, and processes are assessed and evaluated by audit committees. To safeguard the interests of shareholders and stakeholders, they assess how good financial controls, accountancy guidelines, and revelation procedures are in place. 

 

• Communication with Stakeholders: With respect to financial reporting, audit findings, and governance problems, audit committees helps as a conduit for creating communication between the directors of boards, managingt, external auditors, regulators, and other bodies.

 

• Assessment of Financial Performance: Audit committees are in responsibility of evaluating the company’s productivity, liquidness, affluence, and efficacy relations, amongst other financial system of measurement. In order to deal with visions into the company’s overall monetary performance and well-being, they evaluate significant financial limitations.

 

• Evaluation of Quarterly and Annual Financial Statements: The balance sheet, statement of income, statements of cash flow, and associated notes are all involved in the yearly financial declarations that audit committees examine and accept. They assure that, in fulfilment with accounting rules, the monetary statements precisely portray the corporation’s cash flows, performance, and monetary status.

 

• Evaluation of Accounting Policies and procedures: Audit teams assess the appropriateness and reason of the company’s permitted accounting system policies and processes. In edict to confirm observance to accounting ethics and disclosure mandates, they inspect major accountancy estimations and decisions.

 

• Assessment of Internal Audit Function: The effectiveness and recital of the inner audit function are evaluated by audit teams. To make sure inner auditors have the independence, skill, and capitals desired to do their professions well, they inspect the inner audit grant, annually audit strategy, and resourcefulness allocation.

 

• Audit committees are accountable for overseeing the government’s fraud risk management system and compelling part in the analysis of any supposed fraudulent action or mismanage. They go over the consequences of internal inquiries and estimate in what way well counteractive measures have tackled fraudulent action.

CASE LAWS- 

SEBI vs. Price Waterhouse (PW) case 2018–

In this occurrence, Price Waterhouse (PW) and its linkage businesses were banned from auditing listed companies for a period of two years by the Securities and Exchange Board of India (SEBI). PW functioned as the legal auditor in the Satyam scam case, which directed to the obligation of the ban. The incident highlighted how dependable audit companies and auditors are for preserving auditing values and assuring the correctness of financial reporting. 

• Ratio decidendi of the case– The key outcome of this case’s ratio decidendi is that controlling bodies, like the Securities and Exchange Board of India (SEBI), are obliged to take suitable authorised action in contradiction of auditors and audit companies that are exposed to be in violation of securities rules, corporate governance strategies, or auditing values. In this case, Price Waterhouse (PW) and its linkage businesses were banned from auditing listed corporations for the time period of two years by SEBI, by means of its regulatory experts.

CONCLUSION-

Audit committees are important to the corporate authority framework of Indian businesses because their action are as attentive protectors of responsibility, translucence, and financial integrity. The founding and operations of audit committees, which are administered by Indian corporate regulations, guidelines, and governance principles, play a key function in promoting environmental business does, improving investor belief, and alleviating risks. Additionally, audit committees must continue being pre-emptive and pliable as India’s company governance atmosphere changes in reply to fluctuating stakeholder beliefs, market circumstances, and lawful needs. To correctly carry out their omission duties and grip varying risks and problems, their requisite be up to date on innovative inventions in technology, guidelines, and authority.

References-

This article was originally written by independentdirectorsdatabank published on 2023. The link for the same is herein. https://www.independentdirectorsdatabank.in/img/partners/617fafed323ae.pdf 

This article was originally written by indiafilings published on 2024, website. The link for the same is herein https://www.indiafilings.com/learn/audit-committee/.

This article was originally written by indiacode published on 2024. The link for the same is herein https://www.indiacode.nic.in/show-data?actid=AC_CEN_22_29_00008_201318_1517807327856&orderno=181

https://www.indiafilings.com/learn/audit-committee/

This article was originally written by indiafilings published on 2024, website. The link for the same is herein https://www.indiafilings.com/learn/audit-committee/.