AUDIT COMMITTEE – ENTITY LISTED SPECIFIED SECURITIES


In this post we will discuss, audit committees under the Securities and Exchange Board of India (Listing Obligation and Disclosure Requirements) Regulations, 2015 for the listed entities which got listed its specified securities on Stock Exchanges.

Section 177 of the Companies Act, 2013 as discussed earlier here prescribes audit committee for every listed and certain other companies. Regulation 18 of the SEBI (LODR) Regulations, 2015 supplement this requirement for listed companies.

Constitution of Audit Committee

Every listed entity shall constitute a qualified and independent audit committee in accordance with the terms of reference, subject to the following:

  • The audit committee shall have minimum three directors as members.
  • Two-thirds of the members of audit committee shall be independent directors.
  • All members of audit committee 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 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. Occasionally, the audit committee may meet without the presence of any executives of the listed entity. [Regulation 18(1)]

One notable departure from the provision of Section 177 is, under not majority but all members of audit committee shall be financially literate and one shall be financial management expert. There are two explanations to Clause (c) of Regulation 18(1).

Financially Literate: “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. [Explanation (1) to Clause (c) of Regulation 18(1)]

Financial Management Expert: 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.

There is not quantum of experience mention in the regulation and leaved it to wisdom of the board.

Though, audit committee may “occasionally” meet without finance director or head of the finance function, head of internal audit and a representative of the statutory auditor and any other such executives but according to Clause (f) of Regulation 18(1), audit committee at its “discretion” in its meetings shall invite:

  • Finance Director, or head of financial function,
  • Head of internal audit,
  • Representative of the statutory auditor, and
  • any other such executive.

Conduct of Meeting

The listed entity shall conduct the meetings of the audit committee in the following manner:

  • 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.
  • 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.
  • 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. [Regulation 18(2)]

For quorum at least two independent directors is prime requirement, with one third member of audit committee.

Role of Audit Committee

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:

  1. 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;

(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;

(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.

  1. The audit committee shall mandatory 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).

Please note: This blog invite readers to share their comments, suggestions, hardship, queries and everything in comment section. This blog post is not a professional advice but just a knowledge sharing initiative for mutual discussion.

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One response to “AUDIT COMMITTEE – ENTITY LISTED SPECIFIED SECURITIES

  1. Pingback: BOARD COMMITTEES – ENTITY LISTED SPECIFIED SECURITIES | AishMGhrana

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