Give teeth to the audit committees

The audit committee is the immune system of a corporation. It forms a key element in the corporate governance process, in the context of the financial disclosures to be made by a company. In addition to the mandatory appointment of an external auditor to verify accounts, listed companies and certain unlisted companies must establish audit committees.

The statutory basis for formation of audit committees lies in clause 49 of the listing agreement and in the Companies Act, 1956. The primary objective of these regulations is to assure the shareholders that the auditors who act on their behalf will safeguard their interests. Essentially, the goal of an audit committee is to prevent fraud. This requires it to implement and monitor an effective ethics and compliance programme.

Clause 49 requires all listed companies to form audit committees, which must meet at least four times a year. The eligibility criteria require all committee members to be financially literate, with at least one having financial and accounting management expertise. (“Financial literacy” has been defined as the ability to read and understand basic financial statements, along with experience in finance or professional certification in accounting.) Two-thirds of the committee must be independent and it must have three directors, among them an independent chairman.

Priti Suri is the proprietor of PSA.