Role of the audit committee

Audit committee, one of the key pillars of corporate governance and an important operating committee the Board of Directors is responsible for audit and control functions, oversight of financial reporting, disclosure, regulatory compliance and risk management activities of an entity.

The committee focuses on integrity of financial reporting, selection of competent auditors, evaluates their independent functioning, adequacy of internal controls, efficacy of internal audit and compensation of the executives, wherever remuneration committee is non-existent.

All publicly-traded companies in the US, Canada, countries of the European Union and India, must have a qualified audit committee with independent external directors, and at least one qualifying as a financial expert. As per the benchmark propagated by the Institute of Internal Auditors, ideally, an audit committee should comprise a minimum of three members, not exceed six members of the board of directors, and each committee member must be independent in functioning, financially literate and the audit committee must have at least one member competent to be designated as the “financial expert”, as defined by applicable legislation.

RESPONSIBILITIES

While the Audit Committee relies on the management for day-to-day running of the business operations, it has to oversee the overall management functioning, especially relating to the integrity of financial reporting, adoption of accounting policies and principles, appointment of external auditors, their performance and independent functioning, regulatory compliance, whistleblower mechanism and adequacy of internal control process.

The committee should not only approve the internal audit plan and work assignment, but also discuss regularly with the top management its risk management policies and practices, examine quarterly and annual financial reports, management's assumptions relating to critical accounting judgments, fair value issues, impairments and major accounting policies and principles. The committee may direct special investigations using external experts, if deemed necessary.

RISK MANAGEMENT

The audit committee ought to focus on the entity's tax obligation and conformity to applicable tax laws to reduce its risks. When companies are expanding domestically as well as globally by mergers and acquisitions, the audit committee needs to understand the tax implications, especially when double taxation agreements between countries undergo changes, new Direct Taxes Code (DTC) and Goods and Service Tax (GST) laws and Ind-IFRS are on the horizon.

By ensuring proper work programmes to internal audit, selecting competent external auditors and ensuring requisite coordination between internal and external audits, the audit committee can contribute substantially toward implementing quality governance, risk management and compliance with mandatory regulations.

The committee should review IT policy and governance through interactions with the Chief Information Officer, Chief Risk Officer and through the IT steering committee, as well as discussing with the top management regarding key issues such as IT alignment with business goals, and how far it is facilitating achievement of organisational goals, plugging control risks if any, relating to IT architecture, business outsourcing and MIS, and safeguarding information assets, while making certain the entity's business continuity plan and disaster preparedness.

(The author is Director-General, CAG Office.)