The Statutory Mandate
Section 177 requires certain classes of companies to constitute an audit committee. The committee’s role includes: oversight of the company’s financial reporting process; review of financial statements before submission to the board; review of the auditor’s report; approval or modification of related-party transactions; scrutiny of inter-corporate loans and investments; valuation of undertakings or assets; evaluation of internal financial controls; and monitoring the end-use of funds raised through public offers.
Composition and Independence
The audit committee must have a minimum of three directors, with independent directors forming a majority. The chairperson must be an independent director. For listed entities, the composition requirements under LODR are more stringent. A committee that does not meet the composition requirement cannot validly discharge the statutory functions, and its approvals are vulnerable.
The Financial Reporting Review
The committee must review the quarterly, half-yearly, and annual financial statements before they are approved by the board. The review should cover: significant accounting policies; changes in accounting estimates; related-party disclosures; going-concern assumptions; and the auditor’s findings. The minutes should record the committee’s conclusions and the specific issues discussed, not merely that the statements were “reviewed and found satisfactory.”
Internal Controls and IFC
The committee’s oversight of internal financial controls (IFC) is a key element of the directors’ responsibility statement under Section 134(5). The committee should receive the internal auditor’s reports, the management’s response, and the remediation tracker. A committee that receives reports but does not track remediation is performing a review function without an oversight outcome.
RPT Approval and the Omnibus Route
The committee’s RPT approval function is discussed separately, but its centrality to the audit committee’s mandate cannot be overstated. Every RPT that requires board or shareholder approval should first be placed before the audit committee. The committee’s recommendation is a condition precedent to the board’s consideration. A board that approves an RPT without the committee’s recommendation, where the committee is required, has skipped a statutory step.
Interaction with the Statutory Auditor
The committee should meet the statutory auditor without the management present at least once a year. The auditor should report on: significant findings; internal-control deficiencies; management representation issues; and any suspected fraud. The committee should record the auditor’s concerns and the management’s response in the minutes.
Call to Action: For audit committee charter design, IFC documentation, or RPT approval workflow review, contact office@anujdesaiassociates.com or 9619456656. Website: https://anujdesaiassociates.com. LinkedIn: linkedin.com/in/ca-anuj-desai-122547230.