Question3: What is the role of audit committee of a company? Discuss the provisions of section 177 of the Companies Act in this regard.
Answer :
Section 177 of Companies Act, 2013 lay down the provision for audit Committee. This section lays down the composition of the audit committee as well as the functions of the committee. It is a provision very well laid down as it is detailed and provides for improving the effectiveness and efficiency of the company. It is a very important section, laying down an important committee, which assesses the companies’ financial information and makes sure that the information is accurate and complete. This section has also made whistle-blowing policy mandatory in India. This analysis is done to get a better understanding of this important section and to look at the provision in whole with other relevant prescribed rules/regulations.
Purpose of Section 177
This section is very important as it the nitty gritties of the audit committee of a company. The section lays down the following:
Constitution of audit committee: According to this section every listed company and such other classes of companies as prescribed later on have to constitute an audit committee in their company. According to rule 6[14], following are the other classes of companies who shall constitute an audit committee:
Public companies with a paid-up capital of ten crore rupees or more
Public companies having turnover of 100 crore rupees or more
Public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 crore rupees or more.
The audit committee has to consist of minimum of three directors with majority being independent directors. Member of the audit committee in majority should be able to read and understand financial statement, a requirement necessary for smooth functioning of the company.
Role of audit committee: Role of audit committee has been increased and made more qualitative with specific responsibilities including the recommendation for appointment of auditors and monitoring their independence and performance. The term used is recommendation and not having the authority to approve appointment of auditors the audit committee can only recommend; the final say for the choice of auditor rests with shareholders. The other role of audit committee includes examination of the financial statement and the auditors’ report thereon, approval of related party transactions, etc. In case of approval of related party transactions, the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed.
The auditors of a company and the key managerial personnel have a right to be heard in the meetings of the Audit Committee when it considers the auditor’s report, but they will not have a right to make a vote.
The Board’s report of any company has to disclose the composition of an audit committee and where the Board has not accepted any recommendations of the audit committee, the same have to be disclosed in the Board’s report with their reasons for not accepting the recommendations.
Vigil Mechanism: The companies’ act, 2013 lay down provision for vigil mechanism. Section 177(9) of the act, 2013 along with regulation 22 of SEBI listing Obligation Regulation, 2015 deals with whistleblowing provisions. This mechanism enables a company to set up a process which encourages and promotes ethical corporate behaviour by rewarding employees for their integrity and for providing valuable information to the management on deviant practices being adopted in the company. The success and efficient results of such systems in western countries, lead to India adopting them. Now all the companies listed under section 177 of the act, 2013 have to establish a vigil mechanism wherein directors and employees can report apprehension about the conduct of the business, its accounting methods or any other aspects, to the chairperson of the audit committee. The third party has been kept outside this mechanism. The vigil mechanism has to provide for adequate safeguards against victimization of persons who use such mechanisms.
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