• Pratham Dave

COMPANIES ACT 2013: SECTION 177 – AUDIT COMMITTEE

Updated: Mar 25

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INTRODUCTION:


Company law implies that when your company reaches a particular limit or a turnover, then there is a requirement to appoint some individuals from the Board of Directors separately & that is known as the Audit Committee.


The People who are appointed as the Audit Committee members are the ones who are acquiring a competent amount of knowledge relating to finance, book of accounting, audits, etc.


WHAT IS AN AUDIT COMMITTEE?


An operating committee which contains all Board of Directors of the Company and aims to oversee financial reports and disclose all the members.


[Until the enactment of a Companies Act 2013, every public company in India possessing the paid-up capital of not less than Rs. 5 crores was required to constitute an Audit Committee]


The essential motive of the Audit Committee is to allocate the oversight of the financial reporting process, the audit process, the company’s system of internal controls, and compliance with laws and regulations.


APPLICABILITY OF AUDIT COMMITTEE


Board of Directors listed companies and the following classes companies under rule 6 shall constitute the Audit Committee:

  1. All Public Companies with the paid-up capital of Rs. 10 crores or more.

  2. All Public Companies are having turnover of Rs. 100 crores or more.

  3. All Public Companies having aggregate, due loans or debentures or deposits exceeds Rs. 50 crores or more.


COMPOSITION OF AUDIT COMMITTEE:


It is stated under Section 177 of the Companies Act, 2013 that every listed company or any other public class company should have a minimum of 3 directors if they want to constitute the Audit Committee.


Here, the Majority is given in the hands of the chairperson and has the ability to read/understand the financial statements.


It is also stated under the Section 134(4) of the Companies Act 2013, the Board of Directors should disclose the information that how the audit committee has been formed.


In accordance with sub-section (2), Every existing Audit Committee of the company immediately before the commencement of The Companies Act, 2013 shall, within one year of such commencement should be reconstituted.


ROLES AND RESPONSIBILITIES:


The audit committee evaluates management's analysis of critical issues and judgments in financial reports. The audit committee also examines the effects of accounting and regulatory initiatives on financial statements.


The audit committee ensures that appropriate policies and processes for preventing and detecting fraud, such as asset misappropriation, corruption, and financial statement fraud, are in place. The audit committee collaborates with management to ensure that all necessary steps are taken to detect fraud.


The audit committee should comprehend management's responsibilities under anti-corruption laws and decide whether sufficient policies and controls are in place to detect and mitigate corruption risks. They should be knowledgeable of anti-corruption legislation.

The audit committee meets with management and the independent auditor to go over the company's quarterly and audited annual financial statements. They also review earnings announcements, financial details, and recommendations to external rating agencies and analysts.


The management team evaluates and controls the risks that a firm faces. The audit committee should not be overloaded with risk monitoring responsibilities. They are simply in need of reviewing and evaluating the relevant policies. In some companies, the audit committee may also be tasked with regulating cyber risk.


The audit committee is responsible for nominating, supervising, and compensating the independent auditor. Several national exchanges, such as NASDAQ and NYSE, define certain methods of communication that the audit committee must use while supervising independent auditors. The committee and the independent auditor normally meet quarterly to discuss the firm's financial reporting, internal controls, and audit.


Some national stock exchanges may require the audit committee to supervise internal auditors, evaluate their work, and highlight any performance-related issues in the board's report. Separate meetings with the internal auditors are necessary for the audit committee.


The audit committee is in place to ensure that regulations and legislation are followed. They collaborate with management to ensure that the company's policies on the code of conduct and ethics meet the standards.


To understand the risks and duties, as well as the impact on financial reporting, the audit committee must collaborate with other committees. It must comprehend and resolve the impact of non-GAAP compensation measures on risk assessment.



POWER OF THE AUDIT COMMITTEE:

  1. If any contingency has been evaluated or arises, then it can be discussed with the internal or external auditors relating to the issues.

  2. A committee can obtain professional advice from external sources.

  3. The committee has the privilege to access the complete information which contains in the record of the company.

  4. To investigate any matter if it seems doubtful.


VIGIL MECHANISM:


The term "vigil mechanism" or "whistle-blower policy" is well-known around the world. Numerous compliance and fraud surveys demonstrate that Vigil/Whistle-blower procedures are among the most successful methods of detecting corporate fraud. A real Whistle-blower can assist a company and its stakeholders in avoiding fraud or misconduct exposures. In India, the notion of a Vigil Mechanism was established by the Companies Act of 2013.


A Vigil system allows employees and directors of a company to submit concerns to management about unethical behavior, actual or suspected fraud, or violations of the company's Codes of Conduct or any Policy.


Section 177 of the Companies Act, 2013, together with the Rules adopted thereunder, requires the following companies to establish a vigil mechanism:


I. Every Listed Company;

II. Every Company that accepts public deposits;

III. Every Company that has borrowed money from Banks and Public Financial Institutions in excess of Rs. 50 crores.


Companies that are obligated to form an Audit Committee must implement the Vigil system through the Audit Committee. If any of the Audit Committee members have a conflict of interest in a given issue, they must recuse themselves, and the subject will be handled by the other members of the Audit Committee.


For companies that are not required to have an Audit Committee, the Board of Directors shall appoint a director to serve as the Audit Committee for the purposes of the Vigil mechanism. All staff and other Directors must report any issues to the appointed Director.


The Company's Vigil Mechanism Policy shall include reasonable safeguards against victimization of director(s)/employee(s) who use the Vigil Mechanism, as well as mechanisms for directly connecting to the chairperson of the audit committee.

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