Audit Committee under Companies Act 2013 - An analysis

1. Which are the class of Companies that need to constitute Audit Committee? 

2. What should be the composition of the Committee? 

3. What is the qualification prescribed for the members of Audit Committee? 

4. What are the powers and duties of the Committee? 

Please read:

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                                       AUDIT COMMITTEE

Cs. Sankara Subramanian, Company Secretary, Trichy

Audit committee under Companies Act 2013 - A detailed analysis

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Chapter XII [Section 177] of Companies Act, 2013 deals with Audit Committee. The new concepts like Independent Director, Financial literacy of members of the Committee, Whistle blower mechanism etc., are incorporated in the Companies Act, 2013. 

Differences between Companies Act, 1956 and Companies Act, 2013 on provisions relating to Audit Committee are as follows:

Sl. No.	The Companies Act, 1956	The Companies Act, 2013
1.	Section 292A	Section 177
2.	Companies which are required to Constitute Audit Committee: S.292A: Every Public Company having paid-up capital of not less than Rs.5 Crores shall constitute an Audit Committee	Companies which are required to Constitute Audit Committee: S.177 and Draft Rules 12.4: a)      Every listed company; and b)     Every other public company- i)       having paid-up capital of Rs.100 Crores or more; or ii)     which have, in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs.200 Crores shall constitute an Audit Committee
3.	Composition [S.292A(1)]: The Audit Committee shall consist of minimum 3 Directors of which 2/3rd shall be directors other than M.D or Whole time Directors.	Composition [S.177(2) and 149(6)]: The Audit Committee shall consist of a minimum of 3 directors with independent directors forming a majority.
4.	Financial Literacy: While the Companies Act does not have any prescribed qualification, listing Agreement provided that all members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise.	Financial Literacy [S.177(2)] First Proviso: Majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand the financial statement. Effectively, what has been given in the listing agreement is included in the new Act.
5.	Terms of reference [S.292A (2)]: The Audit Committee shall act in accordance with the terms of reference to be specified in writing by the Board. What are all the terms rests with the sole decision of the Board.	Terms of reference [S.177 (4)]: Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include- (i)                the recommendation for appointment, remuneration and terms of appointment of auditors of the company; (ii)              review and monitor the auditor’s independence and performance, and effectiveness of audit process; (iii)            examination of the financial statement and the auditors’ report thereon; (iv)            approval or any subsequent modification of transactions of the company with related parties; (v)              scrutiny of inter-corporate loans and investments; (vi)            valuation of undertakings or assets of the company, wherever it is necessary; (vii)          evaluation of internal financial controls and risk management systems; (viii)        monitoring the end use of funds raised through public offers and related matters.
6.	Composition of Audit Committee in Annual Report [S.292A (4)]: The Annual Report shall disclose the composition of the Audit Committee	Composition of Audit Committee in Board’s Report [S.177(8)]: The Board’s Report shall disclose the composition of the Audit Committee
7.	Evaluation of the Performance of Audit Committee: N.A	Evaluation of the Performance of Audit Committee [S.134(3)(p) and Chapter IX - Draft Rules 9.10 (4)]: All the Companies which falls under the purview of constituting an Audit Committee + Companies with paid-up capital of Rs.25 Crores or more (calculated as at the end of the preceding financial year) should describe the manner of evaluating the performance of Board, Committees and Directors
8.	Right to Vote [S.292A (5)]: The auditor, internal-auditor and Director in-charge of Finance shall attend and participate at the Audit Committee Meetings but however they do not have the right to vote.	Right to Vote [S.177(7) and 2(51)]: The auditors of the company and the key managerial personnel shall have a right to be heard in the meetings of the Audit Committee when it considers the auditor’s report but shall not have the right to vote Note: “…right to be heard…” confers an irrefutable right to the auditors of the company and the key managerial personnel to give their explanations on matters relating to Audit Report.
9.	Powers of Audit Committee [S.292A (6)]: The Audit Committee should have discussions with the auditors periodically about internal control systems, the scope of audit including the observations of the auditors and review the half-yearly and annual financial statements before submission to the Board and also ensure compliance of internal control systems.	Powers of Audit Committee [S.177 (5)]: The Audit Committee may call for the comments of the auditors about internal control systems, the scope of audit, including the observations of the auditors and review of financial statement before their submission to the Board and may also discuss any related issues with the internal and statutory auditors and the management of the company Note: The CA, 2013 makes it discretionary for the Audit Committee to have discussions with Auditors on the aforesaid matters.
10.	No. of Audit Committee Meetings [S.292A (6)]: S.292A(6) mandates for periodical discussion with auditors and review of half yearly and annual financial statement which implies that there shall be a minimum of at least 2 Audit Committee Meetings in an year	No. of Audit Committee Meetings [S.177(4)(iii)] and 2(40): S.177(4)(iii) states that the Audit Committee shall examine the financial statement and the auditors’ report thereon. Hence unless otherwise required there shall be a minimum of at least 1 Audit Committee Meeting in an year. In case of Listed companies, the Audit Committee will meet once in a quarter to approve the quarterly financial results.
11.	Recommendations of Audit Committee [S.292A (8)&(9)]: The recommendations of the Audit Committee on any matter relating to financial management, including the audit report, shall be binding on the Board. If the Board does not accept the recommendations of the Audit Committee, it shall record the reasons therefor and communicate such reasons to the shareholders Note: If the Board does not accept the recommendations of the Audit Committee, it shall at its Meeting record the reasons and hence the refusal has to be recorded in the Minutes of the Board Meeting. Such reasons for refusal shall be communicated to the shareholders i.e. the reasons may not form part of the Board’s Report/Annual Report and a separate communication to the shareholders would suffice.	Recommendations of Audit Committee [177(8)]: Where the Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed in the Board’s Report along with the reasons therefor. Note: If the Board does not accept the recommendations of the Audit Committee, it should be disclosed in the Board’s Report along with reasons for refusal.
12.	Chairman of the Audit Committee and right to attend the AGM [S.292A (2) & (10)]: a.       The members of the audit committee shall elect a Chairman from amongst themselves. b.       The Chairman of the audit committee shall attend the AGM to answer any queries relating to audit	Chairman of the Audit Committee and right to attend the AGM: The Companies Act, 2013 does not contain any provision for the procedure of electing the Chairman of Audit Committee and his right to attend the AGM
13.	Vigil Mechanism (Whistle Blower Mechanism): Companies Act 1956 does not have a mechanism for Whistle Blowing; Listing agreement has a provision on Vigil Mechanism, but has prescribed it as recommendatory only.	Vigil Mechanism (Whistle Blower Mechanism)[ S.177(9) & (10) and Draft Rules 12.5]: Every listed company, companies which accept deposits from the public and companies which have borrowed money from banks and public financial institutions in excess of Rs.50 crores shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed. The vigil mechanism should provide for adequate safeguards against victimization of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases: Provided that the details of establishment of such mechanism shall be disclosed by the Company on its website, if any, and in the Board’s Report. If any of the members of the audit committee are conflicted in a given case, they should recluse themselves and the others on the committee would deal with the matter on hand. In case of companies are not required to constitute an Audit Committee, the Board of Directors shall nominate a Director to play the role of audit committee for the purpose of vigil mechanism to whom other Directors and employees may report their concerns.

Other important points:

1.       Every existing Audit Committee shall upon commencement of the Companies Act, 2013, be reconstituted in accordance with S.177 (2) with in 1 year from the date of commencement [S.177 (3)].

2.       All appointments, including the filling of a casual vacancy of an Auditor under S.139 shall be made after taking into account the recommendations of such Committee [S.139 (11)].

3.       An auditor appointed under this Act shall provide to the Company only such other services as are approved by the Board of Directors or the Audit Committee, as the case may be, subject to the restriction contained in the Section [S.144].

4.       Where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets (herein referred to as the assets) or net worth of a Company or its liabilities under the provision of this Act, it shall be valued by a person having such qualifications and experience and registered as a valuer in such manner, on such terms and conditions as may be prescribed and appointed by the Audit Committee or in its absence by the Board of Directors of that Company [S.247 (1)].

5.       In case of repeated frivolous complaints being filed by a Director or an Employee, the Audit Committee or the Director nominated to play the role of Audit Committee may take suitable action against the concerned Director or Employee including reprimand                                   [Draft Rule 12.5 (4)].

6.       The SEBI in order to align the provisions of Corporate Governance Norms in line with Companies Act, 2013, has approved some gist of proposals at its Board Meeting held on 13^th February, 2014 wherein it was decided to extend the role of Audit Committee.