AUDIT COMMITTEE SECTION 177 OF COMPANIES ACT 2013
Audit Committee as per Section 177 of Companies Act 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) mandate the formation of an Audit Committee for certain companies to oversee financial reporting, internal controls, and audit processes.
Audit Committee Section 177 of Companies Act, 2013
Applicability
As per Section 177 of the Companies Act, 2013, the following companies are required to constitute an Audit Committee:
- All listed companies
- Public companies meeting any of the following criteria:
- Paid-up share capital of ₹10 crore or more
- Turnover of ₹100 crore or more
- Outstanding loans, debentures, and deposits exceeding ₹50 crore
Composition of Audit Committee Section 177 of Companies Act 2013
The Audit Committee must consist of:
- Minimum three directors
- Two-thirds of the members must be independent directors
- All members, including the chairperson, must be financially literate
- At least one member must have expertise in accounting or financial management
Functions and Responsibilities of Audit Committee Section 177 of Companies Act 2013
The Audit Committee plays a vital role in ensuring financial discipline and regulatory compliance. Its key functions include:
- Reviewing financial statements before submission to the board.
- Monitoring auditor independence and performance.
- Examining internal financial controls and risk management systems.
- Overseeing the appointment, remuneration, and terms of auditors.
- Ensuring compliance with legal and regulatory requirements.
- Reviewing whistleblower mechanisms to protect corporate integrity.
Meetings
- The Audit Committee must meet at least four times a year.
- The gap between two meetings should not exceed 120 days.
- The quorum must be two members or one-third of the total members, whichever is greater, with at least two independent directors.
Audit Committee Under SEBI (LODR) Regulations, 2015
Applicability
Regulation 18 of the LODR Regulations mandates that every listed entity must have an Audit Committee.
Composition
The composition requirements under LODR Regulations are similar to those under the Companies Act, 2013:
- Minimum three directors
- At least two-thirds must be independent directors
- All members must be financially literate
- At least one member must have expertise in accounting or financial management
- The chairperson must be an independent director and must attend the Annual General Meeting (AGM)
Roles and Responsibilities
The Audit Committee under LODR Regulations has additional responsibilities, including:
- Reviewing quarterly financial results before submission to the board.
- Overseeing the effectiveness of the audit process.
- Evaluating internal audit reports and risk management policies.
- Ensuring compliance with SEBI regulations.
- Investigating any financial irregularities.
- Seeking external legal or professional advice when necessary.
Meetings
- The Audit Committee must meet at least four times a year.
- The quorum must be two members or one-third of the total members, whichever is greater, with at least two independent directors.
Frequently Asked Questions (FAQs)
Q1: Why is the Audit Committee important?
The Audit Committee ensures financial transparency, strengthens internal controls, and enhances investor confidence by overseeing financial reporting and audit processes.
Q2: What is the role of independent directors in the Audit Committee?
Independent directors provide unbiased oversight, ensuring that financial statements are accurate and that auditors function independently.
Q3: How does the Audit Committee ensure auditor independence?
The committee reviews auditor appointments, remuneration, and performance, ensuring that auditors remain free from conflicts of interest.
Q4: What happens if a company fails to constitute an Audit Committee?
Non-compliance can lead to penalties, regulatory scrutiny, and reputational damage for the company.
Q5: Can the Audit Committee seek external advice?
Yes, the committee has the authority to seek external legal or professional advice to ensure compliance and effective financial oversight.
The Audit Committee plays a crucial role in corporate governance, ensuring financial integrity, regulatory compliance, and risk management. Here are its key responsibilities:
1. Financial Reporting Oversight
- Reviews financial statements to ensure accuracy and compliance with accounting standards.
- Monitors financial disclosures to prevent misstatements or fraud.
- Ensures transparency in financial reporting.
2. Internal Controls and Risk Management
- Evaluates the effectiveness of internal control systems.
- Identifies and mitigates financial and operational risks.
- Oversees the company’s risk management framework.
3. Auditor Independence and Performance
- Appoints, compensates, and oversees external auditors.
- Ensures auditors remain independent and free from conflicts of interest.
- Reviews audit reports and findings.
4. Compliance with Legal and Regulatory Requirements
- Ensures adherence to corporate governance regulations.
- Monitors compliance with financial and accounting laws.
- Reviews policies related to ethical conduct and fraud prevention.
5. Internal Audit Function
- Oversees the internal audit team’s activities and effectiveness.
- Approves the internal audit plan and ensures alignment with company objectives.
- Reviews internal audit reports and ensures corrective actions are taken.
6. Whistleblower Mechanism
- Establishes and monitors a system for employees to report unethical practices.
- Ensures protection for whistleblowers against retaliation.
- Investigates reported concerns and takes necessary actions.