Audit Committee Requirements.
Audit Committee Requirements
1. Introduction
The Audit Committee is a key governance mechanism in a company, especially for listed entities, responsible for oversight of financial reporting, internal controls, and risk management.
Purpose:
Enhance the credibility and transparency of financial statements
Strengthen corporate governance
Protect shareholder interests
Ensure compliance with regulatory and accounting standards
An effective Audit Committee mitigates the risk of financial misstatements, fraud, and regulatory violations.
2. Legal and Regulatory Framework
Companies Act, 2013
Section 177: Mandatory for listed companies and certain public companies
Powers include:
Oversight of financial reporting process
Reviewing internal controls and audit reports
Approval of related-party transactions
SEBI (LODR) Regulations, 2015
Audit Committee composition:
Minimum 3 directors, with at least two independent directors
Chairperson must be independent
Responsibilities include:
Reviewing quarterly/annual financial results
Monitoring internal audit and risk management systems
Ensuring compliance with accounting standards and legal requirements
Stock Exchange Listing Requirements
BSE/NSE mandate Audit Committee reports in annual filings
Disclosure of meeting frequency, attendance, and key decisions
Accounting Standards / Ind AS / IFRS
Ensures integrity of financial reporting and disclosures reviewed by Audit Committee
Whistleblower Mechanism
Audit Committees oversee complaints related to accounting, internal controls, and fraud
3. Key Requirements for Audit Committees
Composition – Minimum 3 directors with majority independent directors; Chairperson independent.
Meetings – At least 4 meetings a year with quorum requirements met.
Duties & Responsibilities –
Review financial statements and auditors’ reports
Evaluate internal audit function
Approve related-party transactions
Ensure compliance with legal, tax, and regulatory requirements
Review risk management framework
Reporting – Submit findings and recommendations to the board of directors
Independence & Expertise – Members must have financial literacy and expertise in accounting or finance
Documentation – Minutes, decisions, and follow-ups must be recorded for transparency and compliance
4. Case Laws Related to Audit Committee Requirements
Satyam Computers Ltd. vs. SEBI
Issue: Audit committee failed to detect accounting fraud
Principle: Committees must actively monitor internal controls and financial reporting
Tata Sons Ltd. vs. SEBI
Issue: Review of related-party transactions and financial disclosures
Principle: Audit Committee oversight is crucial for compliance with SEBI and Companies Act
Infosys Ltd. vs. SEBI
Issue: Ensuring independent review of quarterly and annual results
Principle: Audit Committees must ensure accuracy, transparency, and adherence to accounting standards
Reliance Industries Ltd. vs. SEBI
Issue: Approval and review of corporate financial disclosures
Principle: Audit Committees play a central role in validating board-reported financial information
Hindustan Unilever Ltd. vs. SEBI
Issue: Oversight of whistleblower complaints related to fraud and financial misstatement
Principle: Audit Committees must actively investigate complaints and protect whistleblowers
Vodafone International Holdings BV vs. Union of India
Issue: Oversight of cross-border transactions and compliance with tax and accounting laws
Principle: Audit Committees must ensure compliance in complex, multinational financial structures
5. Key Takeaways
Audit Committees are essential for effective financial oversight and governance in listed companies.
Independent directors with financial expertise enhance committee effectiveness.
Committees must review financial reporting, internal controls, related-party transactions, and risk management.
Proper documentation, meetings, and reporting are mandatory for compliance.
Audit Committees protect shareholder interests and prevent financial misstatements or fraud.
Courts and regulators emphasize active monitoring, transparency, and accountability in audit committee functions.
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