Audit committee and financial reporting in Corporate

1. Audit Committee and Financial Reporting of Corporate
Sectors in India- An overview
Dr. M. Muninarayanappa
Professor, Dean & Chairmen
Member of Syndicate & Academic Council
Faculty of Commerce & Management
Bangalore University
Bengaluru
&
N Sujatha
Research Scholar
Dept. of Commerce
Bangalore University
Bengaluru

2. Audit committee and financial reporting of corporate sectors in India- An
overview
Abstract
Management is responsible for preparing the company’s financial statements, and the
independent auditors are responsible for auditing those fiscal statements. The audit committee
is established with the aim of enhancing confidence in the integrity of an organisation's
processes and procedures relating to internal control and corporate reporting including financial
reporting. Audit Committee provides an ‘independent’ reassurance to the board through its
oversight and monitoring role. Among many responsibilities the boards entrust the Audit
Committee with are the transparency and accuracy of financial reporting and disclosures,
effectiveness of external and internal audit functions, robustness of the systems of internal audit
and internal controls, effectiveness of anti-fraud, ethics and compliance systems, review of the
functioning of the whistle-blower mechanism. Thus, it may be inferred that the companies
may improve the financial reporting quality, by managing the board size, audit committee
meetings and size, as these characteristics have significant relationship with financial reporting
quality.
Key words: audit committee, financial reporting, meeting, independent directors, board size.
Introduction
Investors are certain to seek more information and ask more questions regarding the quality of
financial reporting and a company’s financial condition. Because earnings are at the forefront
of the investing public’s mind, this document focuses on how audit committee members,
boards, management, and other financial statement users can better understand and assess the
quality of earnings. Current business trends stability, have increased both the pressures and
the opportunities for fraud to occur. Additionally, organizations must respond to the heightened
public and regulatory scrutiny, and the potential for reputational damage that follow fraud
allegations.
Audit Committee has thus become one of the main pillars of the corporate governance system
in Indian public companies. In steering companies through today’s complex business
environment, boards are going to need strong leadership from their audit committees.
Expanding the field of vision, clearly defining who’s tracking the company’s risk radar, and
taking a step back to re-evaluate its own performance.

3. Objectives
• To provide an overview of the functions of audit committees.
• To understand the roles and responsibilities of audit committees in Financial Reporting.
• To understand the duties, responsibilities, and composition of the audit committees.
Review of literature
Ritika Gugnani (2013)- reviews the relationship between AC and Performance of listed
companies and analysed that firms have improved their internal audit and governance after
implementation of Clause 49
Riadh Manita (2010)- the study discussed the approaches and measures od audit works, audit
quality and control must reside at the level of audit process.
Nizamulmulk(2016)- the study aims to measure the emphasized the audit committees on bank
performance.
Kota.H.B(2010)- the study found that CEO duality structure contributes positively and
significantly to the firm Performance.
Yusef Hassen (2016)-the study explores the relationship between corporate performance and
corporate governance. Accounting and market performance measures were used to proxy
corporate performance.
Sahu.T.K(2013)- the study results in e board size and board meetings have positive impact and
independence of board and non-executive has negative impact on corporate governance of the
firm
Laith.A.Aryan(2015)- reviews the interest in CG in terms of enhancing the quality of financial
statements and restore the investors’ confidence.
Audit Committee
I. Qualified and Independent Audit Committee A qualified and independent audit committee
shall be set up, giving the terms of reference subject to the following:
i. The audit committee must have minimum three directors as members. 2/3rd of the members
of audit committee will be independent directors.

4. ii. All members must be financially literate in audit committee and at least one member must
have accounting or related financial management expertise.
iii. The Chairman of the Audit Committee must be an independent director;
iv. The Chairman of the Audit Committee will be present at Annual General Meeting to answer
shareholder questions;
v. The audit committee may invite such of the executives, as it considers appropriate (and
particularly the head of the finance function) to be present at the meetings of the committee,
but on occasions it may also meet without the presence of any executives of the company. The
finance director, head of internal audit and a representative of the statutory auditor may be
present as invitees for the meetings of the audit committee;
vi. The Company Secretary will act as the secretary to the Audit committee.
(B) Meeting of Audit Committee
The audit committee should meet at least four times in a year and not more than four months
shall elapse between two meetings. The quorum shall be either two members or one third of
the members of the audit committee whichever is greater, but there should be a minimum of
two independent members present.
(C) Powers of Audit Committee
The audit committee shall have powers, which should include the following:
1. To scrutinize any activity within its terms of reference.
2. To find information from any employee.
3. To acquire outside legal or other professional advice.
4. To obtain attendance of outsiders with pertinent expertise, if it is considered necessary.
Role of Audit Committee
• Supervision of company’s financial reporting process
• To approve statutory auditor to Board, their appointment, re-appointment, substitution
or elimination, terms and amount of audit fees , approval for payment for any other services
rendered by statutory auditors.

5. • To analyse quarterly and annual financial statement with the management before
submitting to the board for sanction, with certain reference to.
• Matters necessary to be included in the Director’s responsibility Statement and to be
included in the Board’s reports in terms of clause (2AA) of the section 217 of the Companies
Act, 1956
• Changes, if any, in accounting policies and practices and reasons for the same.
• Major accounting records involving entries based on the exercise of judgment by
management.
• Important adjustment made in financial statement arising out of the audit findings.
• Compliance in listing and other legal requirement relating to financial statement
• Disclosure of any party transactions
• Qualifications in draft audit report
• To review the statement of uses/ application of funds rose through any issue and IPO
proceedings.
Clause 49 of the listing agreement with stock exchanges empowers the audit committee the
authority to appoint, reappoint, replace or remove the external auditor.
Financial Reporting
The transparency and Disclosure of the financial statements and the quality of the financial
position are critical in assessing a company. With the media, analysts, investors, and
government leaders all challenging companies’ integrity, there is a need for greater
transparency in financial reporting.
Quality of financial position, the balance sheet and beyond the transparency of the financial
statements and the quality of the financial position are critical in assessing companies,
especially given the proliferation of complex, global business structures.
Definition of Financial REPORTING
Financial Reporting involves the disclosure of financial information to the various stakeholders
about the financial performance and financial position of the organization over a specified
period of time. These stakeholders include – investors, creditors, public, debt providers,

6. governments & government agencies. In case of listed companies the frequency of financial
reporting is quarterly & annual.
Financial Reporting is usually considered an end product of Accounting.
The typical components of financial reporting are:
The financial statements – Balance Sheet, Profit & loss account, Cash flow statement &
Statement of changes in stock holder’s equity
1. The notes to financial statements
2. Quarterly & Annual reports (in case of listed companies)
3. Prospectus (In case of companies going for IPOs)
4. Management Discussion & Analysis (In case of public companies)
The Government and the Institute of Chartered Accounts of India (ICAI) have issued various
accounting standards & guidance notes which are applied for the purpose of financial reporting.
This ensures uniformity across various diversified industries when they prepare & present their
financial statements.
According to International Accounting Standard Board (IASB), the objective of financial
reporting is “to provide information about the financial position, performance and changes in
financial position of an enterprise that is useful to a wide range of users in making economic
decisions.”
1. Providing information to investors, promoters, debt provider and creditors which is
used to enable them to male rational and prudent decisions regarding investment, credit
etc.
2. Providing information to shareholders & public at large in case of listed companies
about various aspects of an organization.
3. Providing information as to how an organization is procuring & using various
resources.
4. Providing information to various stakeholders regarding performance management of
an organization as to how diligently & ethically they are discharging their fiduciary
duties & responsibilities.
5. Providing information to the statutory auditors which in turn facilitates audit.
6. Enhancing social welfare by looking into the interest of employees, trade union &
Government.

7. Conclusion:
The role of audit committee and auditors in current scenario become very important.
Stakeholders expect loyalty and trust from auditor and auditing committee while resolving
financial facts and exposing at all fraud and fault in organization. If a company has an active
and strong audit committees to conduct effective auditing and compliance checklist leads the
companies to efficiently maintain records. The study reveals that there is an enhanced financial
performance when there is verification of accounts lines in committees.
References;
1. Kota, H. B., & Tomar, S. (2010). Corporate governance practices in Indian firms. Journal of
Management & Organization, 16(02), 266-279.
2. Nizamilmulk Gunes and M.Serkan Aftigan (2016) Comparison of the effectiveness of audit
companies in the UK and Turkish Banks. International lournal of financial research, vol.7.
3. Yousef Hassan, Kamal Naser, Rafig.H.Hijazi (2016) the influence of corporate governance
in corporate performance; Evidence from Palestine, research gate
4. Sahu, T. N., & Manna, A. (2013). Impact of Board Composition and Board Meeting On
Firms' Performance: A Study of Selected Indian Companies. Vilakshan: The XIMB Journal of
Management.
5. Laith.A.Aryan(2015)”The Relationship between Audit Committee characteristics, Audit
firm quality and companies profitability” Asian Journal of finance and Accountability, Vol.7.
No.2,2015 ISSN 1946-052X
6. Riadh Manita and Najona Elommal(2010)”The Quality of Audit Process: An Empirical
Study with Audit Committees” International Journal of Buisness,15(1)2010 ISSN 1083-4346.
7. http://www.mca.gov.in/Ministry/pdf/Notification_20022015.pdf
8. http://www.mca.gov.in/MinistryV2/Stand.html
9. www.pwc.com
10. http://www2.deloitte.com/in/en/industries
11. https://home.kpmg.com/xx/en/home/industries.html
12. https://www.edupristine.com/blog/finacial -reporting.

8. 13. http://www.ifrs.org