1. Audit committee and investor confidence in India
“Audit committees represent the most reliable guardians of the public interest.”
-Arthur Levitt, Chairman, Securities and Exchange Commission
Audit Committee has an acute role to play in safeguarding the reliability of financial management of
the company. This Committee ensures the shareholders that the auditors, who act on their behalf, are
in a position to protect their interest. It is an epitome of the parameters of probity, accountability,
disclosures and transparency to maximize value for the stakeholders. Since these are the values and
principles ensured by corporate governance one can say that audit committee serves as a pillar of
corporate governance. An “Audit Committee” is a key element in the Corporate Governance process
of any organization.1
Corporate governance means the total functioning of the company and the conduct of business
internally and externally and embraces the complete accountability of the management and the Board
of Directors to the shareholders and the wider public2
. It is stated that “Corporate governance is the
system by which businesses are directed and controlled3
.” In fact, the primary aim of CG is leading
the affairs of a corporation in such a way that there is ‘fairness’ to all stakeholders and that its actions
benefit the ‘greatest’ number of stakeholders. Successful corporate governance lies in balancing the
various conflicting interest groups i.e. investors, creditors, employees, government and society at
large4
.
An Audit Committee plays a pivotal role in imparting corporate governance in any organization. The
Audit Committee is established to give additional assurance regarding the quality and reliability of the
financial information used by the board and financial issued by the company5
. Creative accounting
and rampant corporate scandals enunciate the need for having effective audit committee as the old
saying goes very pertinently that necessity is the mother of inventions.6In the last decade US
witnessed a number of massive corporate failures like Enron, WorldCom, and Global
Crossing etc. which impelled legislative and regulatory reforms. These were caused as a
result of failure of audit function and negligence of auditors7. Thus, the relation between
corporate governance and audit committee cannot be overlooked.
1XENIA LEY PARKER, INFORMATION TECHNOLOGY AUDITS, 5 (CCH-A Wolter’s Kluwer Business Publishing,1st
edition, 2008)
2Id.
3 Andrian Cadbury,Report of the Committee on the Financial Aspects of Corporate Governance (UK - Cadbury
Report, London, 1992)
4K. SEKHAR, GUIDE TO SEBI, CAPITAL ISSUES, DEBENTURES AND LISTING, Vol. 2, 2362,( Wadhwa Nagpur, 3rded.,
2003)
5Dr. Sanjiv Agarwal, Corporate Governance Through Audit Committees, THE CHARTERED ACCOUNTANT,
November 2006 at 733
6Id
7CHRISTINE A MALLIN, HANDBOOK ON INTERNATIONAL CORPORATE GOVERNANCE COUNTRY ANALYSES 414,
(2ndedn 2009)

2. Carlos E Campos8
says that there are fifteen elements of good governance as: dispersed ownership,
transparent ownership, one share/one vote, anti-takeover defences, meeting notification, board size,
outside directors, independent directors, written board guidelines, board committees, disclosure,
accounting standards, independent audit, board disclosure and timely disclosure. It completes almost
all possible elements of good governance.
The examination by an independent agency such as the Auditor is practically the only safeguard the
shareholders have against the enterprise9
and the role of audit committee is to supervise, monitor and
also carry out financial management and it also acts as a bridge between outside auditors and Board of
Directors. Thus, an effective audit committee is a vital component of an effective corporate
governance system.
Historical PERSPETIVE OFAUDIT COMMITTEE
In 1992, The Financial Aspects of Corporate Governance, otherwise known as Cadbury Report,
issued by "The Committee on the Financial Aspects of Corporate Governance" and chaired by Adrian
Cadbury was the first ever committee report which discussed about corporate governance and
recommended on the arrangement of company boards and accounting systems to mitigate corporate
governance risks and failures. The objectives of the Cadbury Committee10
was “To help raise the
standards of corporate governance and the level of confidence in financial reporting and auditing by
setting out clearly what it seems as the respective responsibilities of those involved and what it
believes his expected of them”. Its important recommendations include the setting up of an audit
committee with independent members.
In India the concept of audit committee and its recommendation of practice were first suggested by
Confederation ofIndian Industries in 1998. Desirable Corporate Governance Code put forward by
CII in April 1998 stated the responsibility of the Board in constitution of audit committee. The
following are its recommendations regarding audit committee11
:-
 Listed companies with either a turnover of over Rs.100 crores or a paid-up capital of
Rs.20 crores should set up Audit Committees within two years.
 Audit Committees should consist of at least three members, all drawn from a
company’s non-executive directors, who should have adequate knowledge of finance,
accounts and basic elements of company law.
 To be effective, the Audit Committees should have clearly defined Terms of
Reference and its members must be willing to spend more time on the company’s
work vis-à-vis other non-executive directors.
 Audit Committees should assist the board in fulfilling its functions relating to
corporate accounting and reporting practices, financial and accounting controls, and
8PRADEEP KUMAR PANDEY, Corporate Governance in India: An Overview, in CORPORATISATION AND
CORPORATE SOCIAL RESPONSIBILITY, 103-105(Dipak Das ed. SBS Publishers and Distributors,2012)
9Deputy Secretary to the Government of India,Ministry of Financev.S.N Das Gupta, (1955) 25 Com Cases 423
10A.C. FERNADO, CORPORATE GOVERNANCE, PRINCIPLES, POLICIES AND PRACTICES 77 (Pearson,2nd ed. 2006)
11 See for more, Availableat http://www.nfcgindia.org/desirable_corporate_governance_cii.pdf Visited on
10/11/13

3. financial statements and proposals that accompany the public issue of any
security—and thus provide effective supervision of the financial reporting process.
 Audit Committees should periodically interact with the statutory auditors and the
internal auditors to ascertain the quality and veracity of the company’s accounts as
well as the capability of the auditors themselves.
In 1999 a committee was set up under the chairmanship of Shri Kumar Mangalam Birla by
Securities and Exchange Board of India with an objective to promote and raise the standards
of good corporate governance. In early 2000, the SEBI board had accepted and ratified key
recommendations of this committee, and these were incorporated into Clause 49 of the
Listing Agreement of the Stock Exchanges. Its recommendations12
on audit committee are as
follows:-
 Board to set up qualified and independent audit committee to enhance the
credibility of financial disclosure and to promote transparency.
 Audit Committee should have at least three directors with one being finance
literate.
 Companies to provide consolidated statements in respect of all its
subsidiaries in which they hold 51% or more of the share capital.
 Shareholders to show greater degree of interest and involvement in the
appointment of directors and the auditors.
 Audit Committee should meet at least thrice in a year.
 Chairman of Audit Committee should be present in Annual General Meeting.
In August 2002 the Department of Company Affairs under the Ministry of Finance and Company
Affairs appointed Naresh Chandra committee to address various corporate governance issues which
submitted its report in December 2002. The committee strongly recommended that “a good
accounting system is a strong indication of the management commitment to governance.13
” Its
recommendations on audit committee are as follows:-
 Audit firm’s rotation is not mandatory.
 Every five years audit partners should rotate.
 Audit committee should be constituted with solely of independent directors.
 Companies should have at least 50 % of independent directors.
 Certain professional assignments should not be undertaken by auditors.
 Audit Committee should have an audit charter.
Toward the end of the year 2002, the SEBI committee on corporate governance was constituted under
the chairmanship of Shri.N.R Narayana Murthy. Some of the major recommendations of the
committee primarily related to audit committees, audit reports, independent directors, related party
12
Department of Company Affairs (2000) Report of the taskforce on Corporate Excellence through Governance
(on the basis of report submitted by a committee chaired by Dr P L Sanjeeva Reddy & by Kumar Mangalam
Birla Committee on corporate Governance , Chartered Secretary ( March 2000)
13
Report on Corporate Governance by committee headed by Shri.Naresh Chandra on Regulation of private
companies and partnership.

4. transactions, risk management, directorships and director compensation, codes of conduct and
financial disclosures14
. Its recommendations on audit committee includes:-
 Audit Committee of listed companies should review financial statements, draft audit reports
and quarterly information, management, discussion and analysis; management letters of
internal and statutory auditors, records of related party transactions etc.
 All audit committee should be financially literate and at least one member should have
accounting and financial management expertise.
 Persons who observe unethical or improper practice should be able to approach the audit
committee freely.
 Appointment, removal and terms of remuneration of internal auditor should be reviewed by
audit committee.
 Provisions relating to the composition of board of directors of holding company should be
made applicable to subsidiary companies also.
The Satyam-Maytas and Infra-Maytas Properties scandal is another instance of a huge fraud. Satyam
is a one of the incident which shook Indian Corporate world, especially considering the magnitude of
the malfeasance. The Satyam episode urged a cross check on our system of corporate governance and
norms. A Task Force under Mr. Naresh Chandra in February 2009 was the next step by CII. The
intention was to recommend ways of further improving corporate governance standards and practices
both in letter and spirit. The Task Force also emphasized on the working of audit committee for better
discipline.
MEANINNG ANDDefinition ofAUDIT COMMITTEE
The Audit Committee is a sub-committee of the Board, which plays a key role in corporate
governance. It is created to assist the board of directors in the discharge of the latter’s oversight
responsibility, particularly in relation to financial reporting, integrity, internal control, risk
management and corporate standards of behaviour15
. In 2002 SOX Act adopted the following
definition of the audit committee as: A committee (or equivalent body) established by and amongst
the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting
processes of the issuer, and audits of the financial statements of the issuer16
. "
Audit Committee is an independent body composed of outside and independent directors to overview
the whole financial system of the company. It ensures that corporate managements are more
accountable to its shareholders17
. The Securities and Exchange Commission (SEC) Chairman Arthur
Levitt said: “Audit committees represent the most reliable guardians of the public interest18
.”
THE INTERNAL AUDITOR, STATUTORY AUDITOR ANDAUDIT COMMITTEE
14 Securities and Exchange Board of India (2002) Report on SEBI Committee on Corporate Governance (under
the chairmanship of Shri N R Narayanamurthy)
15PradeepTibrewala,Effective Use of Audit Committees for Real Corporate Governance in India, THE
CHARTERED ACCOUNTANT, April 2006 at1512
16 Section 2a [3A] of SOX Act, 2002
17 MALLIN Supra note 7 at 390
18Id.

5. The Institute of Chartered Accountants of India defined internal audit in the preface to the 'Standards
on Internal Audit19
' as, ‘internal audit is an independent management function, which involves a
continuous and critical appraisal of the functioning of an entity with a view to suggest improvements
thereto and add value to and strengthen the overall governance mechanism of the entity, including the
entity's strategic risk management and internal control system.’ While management is responsible for
internal controls, the internal auditors are in a position to evaluate and report on the adequacy and
effectiveness of those controls20
. An internal auditor holds an exceptional locus. Even though he is an
employee of the management he has the duty to analyse the conduct of management.
An audit committee needs to assure that the company’s comprehensive internal audit program
evaluates the adherence to management’s policies and procedures. Audit Committee should also
review the internal audit plans as well as organisational structure and composition of internal audit
department21
.
According to European Communities Regulations, 201022
, “statutory audit” means an audit of
individual accounts or group accounts in so far as required by Community law and “statutory auditor”
means a natural person who is approved in accordance with these Regulations to carry out statutory
audits. Section 224(1) of the Companies Act, 1956 states that every company whether it is private or
public company shall have an auditor to audit its account. The appointment of auditor is mandatory in
Annual General Meeting for the following year. Thus the act seeks to ensure that the appointment of
auditors is not in the hands of the directors and is vested in the general body of shareholders. This
shows the independence role of the statutory auditors. Further Section 226 mandates that the auditor
shall be a chartered accountant within the meaning of Chartered Accountants Act, 1949 and also
declares disqualified if the following are appointed as auditors.
 An officer or employee of the company;
 A person who is partner with an employee of the company or employee of an employee of the
company;
 Any person who is indebted to a company for a sum exceeding Rs. 1,000/- or who have
guaranteed to the company on behalf of another person for a sum exceeding Rs. 1,000/-.
 A person who is holding any security of that company.23
All these provisions ensure the
independence of external auditors.
The external auditors in discharge of their duties are expected to communicate certain information to
the audit committee, including matters such as disagreement with management, consultation with
other accountants and difficulties encountered in performing the audit such as unreasonable delays by
management or unavailability of client personnel. Further, the external auditors would be required to
report illegal acts detected during the audit to management and the audit committee24
.
The audit committee coordinates both the external and internal auditors. All these clearly reveal the
role of audit committee in imparting corporate governance. It is a highly specialized committee of
19 The original Prefaceto the Standards on Internal Audit was issued in November, 2004 and revised in July,
2007.The revised Preface has also been published in the August 2007 issueof The Chartered Accountant
20MALLIN Supra note 7 at 378
21SANJIV AGARWAL, AUDIT COMMITTEE LAW AND PRACTICE 17 (Snow white Publications,Mumbai,1stedn
2003)
22 EUROPEAN COMMUNITIES (STATUTORY AUDITS) (DIRECTIVE 2006/43/EC) REGULATIONS 2010
23 After a period of one year from the date of commencement Companies (Amendment) Act, 2000
24MALLIN Supra note 27 at 379

6. board of directors which ensures financial integrity and credibility of accounts and asset function
carried out by the auditors.
Primaryduties and responsibilities ofAnAudit Committee
 Monitor the integrity of the Company’s internal controls over financial reporting.
 Monitor the qualifications, independence and performance of the Company’s independent
auditor and internal auditing function.
 Provide a channel of communication among the Board, the independent auditor, internal
auditing function, management and other concerned individuals.
 As a committee of the Board of Directors, assist the Board in meeting its fiduciary duties to
shareholders and the Company.
Each audit committee member continues to have fiduciary duties to the company and its shareholders,
which include the duty of care, the duty of loyalty, and the duty to make informed judgments.
Legal Framework inIndia
In February 2000 the Securities and Exchange Board of India suggested the incorporation of
recommendation of Kumar Mangalam Birla Committee Report on Corporate Governance in
Clause 49 of Listing Agreements25 which mandated formation of Audit Committees by all
25 Clause49II-AuditCommittee.
A. Qualified and Independent Audit Committee
i. A qualified and independent auditcommittee shall beset up and shall comply with the following:
 The auditcommittee shall haveminimumthree members. All the members of auditcommittee shall
be non-executive directors,with the majority of them being independent.
 All members of auditcommittee shall befinancially literateand at leastone member shall have
accountingor related financial management expertise.
Explanation (i):The term "financially literate"means the ability to read and understand basic financial
statements i.e. balancesheet, profitand loss account,and statement of cash flows.
Explanation (ii):Amember will beconsidered to have accountingor related financial management expertise if
he or she possesses experiencein financeor accounting,or requisiteprofessional certification in accounting,
or any other comparableexperience or background which results in the individual’s financial sophistication,
includingbeingor havingbeen a chief executive officer,chief financial officer,or other senior officer with
financial oversightresponsibilities.
ii. The Chairman of the Committee shall bean independent director;
iii. The Chairman shall bepresent atAnnual General Meeting to answer shareholder queries;
iv. The auditcommittee should invitesuch of the executives, as itconsiders appropriate(and particularly
the head of the financefunction) to be present at the meetings of the committee, but on occasionsit
may also meet without the presence of any executives of the company. The financedirector,head of
internal auditand when required, a representative of the external auditor shall bepresent as invitees
for the meetings of the auditcommittee;
v. The Company Secretary shall actas the secretary to the committee.
B. Meeting of Audit Committee

7. The auditcommittee shall meet atleastthrice a year. One meeting shall beheld before finalization of annual
accounts and one every six months.The quorum shall beeither two members or one third of the members of
the auditcommittee, whichever is higher and minimum of two independent directors.
C. Powers of Audit Committee
The auditcommittee shall havepowers which should includethe following:
1. To investigateany activity within its terms of reference.
2. To seek information from any employee.
3. To obtain outsidelegal or other professional advice.
4. To secureattendance of outsiders with relevant expertise, if it considers necessary.
D. Role of Audit Committee
(i) The role of the auditcommittee shall includethefollowing:
a. Oversightof the company’s financial reportingprocess and the disclosureof its financial information
to ensure that the financial statement is correct,sufficientand credible.
b. Recommending the appointment and removal of external auditor,fixation of auditfee and also
approval for payment for any other services.
c. Reviewing with management the annual financial statements before submission to the board,
focusingprimarily on;
 Any changes in accountingpolicies and practices.
 Major accountingentries based on exercise of judgment by management.
 Qualificationsin draftauditreport.
 Significantadjustments arisingoutof audit.
 The going concern assumption.
 Compliancewith accountingstandards.
 Compliancewith stock exchange and legal requirements concerningfinancial
statements
 Any related party transactions
d. Reviewing with the management, external and internal auditors,the adequacy of internal control
systems.
e. Reviewing the adequacy of internal auditfunction,includingthestructure of the interna l audit
department, staffingand seniority of the official headingthe department, reporting structure
coverage and frequency of internal audit.
f. Discussion with internal auditorsany significantfindingsand followup there on.
g. Reviewing the findings of any internal investigationsby the internal auditors into matters where there
is suspected fraud or irregularity or a failureof internal control systems of a material nature and
reporting the matter to the board.
h. Discussion with external auditors before the auditcommences aboutnature and scope of auditas
well as post-auditdiscussion to ascertain any area of concern.
i. Reviewing the company’s financial and risk management policies.
j. To look into the reasons for substantial defaults in thepayment to the depositors,debenture holders,
shareholders (in caseof non-payment of declared dividends) and creditors.
Explanation (i):The term "related party transactions"shall havethe same meaning as contained in the
Accounting Standard 18, Related Party Transactions,issued by The Institute of Chartered Accountants of India.
Explanation (ii):If the company has set up an auditcommittee pursuantto provision of the Companies Act, the
company agrees that the said auditcommittee shall havesuch additional functions / features as is contained in
the ListingAgreement.
E. Review of information by Audit Committee
The Audit Committee shall mandatorily reviewthe followinginformation:
 Financial statements and draft auditreport, includingquarterly/half-yearly financial information;
 Management discussion and analysisof financial condition and results of operations;
 Reports relatingto compliancewith laws and to risk management;
 Management letters / letters of internal control weaknesses issued by statutory / internal auditors;
and
 Records of related party transactions

8. Listed Companies. Earlier, the Companies (Amendment) Act 2000 inserted Section 292A26
in the
Companies Act, 1956 making the Audit Committees of the Board as a mandatory requirement for all
Public companies with a minimum paid up capital of not less than Rs.5.00crores. Section 17727
of the
New Companies Act, 2013 lay down the provisions regarding audit committee.
 The appointment, removal and terms of remuneration of the Chief internal auditor shall besubjectto
review by the Audit Committee.
26Section 292A says:(1) Every public company havingpaid-up capital of not less than five crores of rupees shall
constitute a committee of the Board knows as "Audit Committee" which shall consistof not less than three
directors and such number of other directors as the Board may determine of which two thirds of the total
number of members shall bedirectors,other than managing or whole-time directors.
(2) Every Audit Committee constituted under sub-section (1) shall actin accordancewith terms of reference to
be specified in writingby the Board.
(3) The members of the Audit Committee shall electa chairman fromamongst themselves.
(4) The annual reportof the company shall disclosethe composition of the Audit Committee.
(5) The auditors, the internal auditor,if any, and the director-in-chargeof financeshall attend and participate
at meetings of the Audit Committee but shall nothave the right to vote.
(6) The Audit Committee should havediscussionswith the auditors periodically about internal control systems,
the scope of auditincludingtheobservations of the auditors and review the half-yearly and annual financial
statements before submission to the Board and also ensurecomplianceof internal control systems.
(7) The Audit Committee shall haveauthority to investigateinto any matter in relation to the items specified in
this section or referred to it by the Board and for this purpose, shall havefull accessto information contained
in the records of the company and external professional advice,if necessary.
(8) The recommendations of the Audit Committee on any matter relatingto financial management, including
the auditreport, shall bebindingon the Board.
(9) If the Board does not accept the recommendations of the Audit Committee, itshall record the reasons
therefor and communicate such reasons to the shareholders.
(10) The chairman of the Audit Committee shall attend the annual general meetings of the company to provide
any clarification on matters relatingto audit.
(11) If a default is made in complyingwith the provisions of this section,the company, and every officer who is
in default, shall bepunishablewith imprisonmentfor a term which may extend to one year, or with fine which
may extend to fifty thousand rupees, or with both.
27Section 177:- (1) The Board of Directors of every listed company and such other classor classes of
companies,as may be prescribed,shall constitutean Audit Committee.
(2) The Audit Committee shall consistof a minimum of three directors with independent directors forminga
majority:
Provided that majority of members of Audit Committee includingits Chairperson shall bepersons with ability
to read and understand,the financial statement.
(3) Every Audit Committee of a company existingimmediately before the commencement of this Act shall,
within one year of such commencement, be reconstituted in accordancewith sub-section (2).
(4) Every Audit Committee shall actin accordancewith the terms of reference specified in writingby 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 auditprocess;
(iii) examination of the financial statement and the auditors’report thereon;
(iv) approval or any subsequent modification of transactionsof 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 controlsand risk management systems;
(viii)monitoringthe end use of funds raised through public offers and related matters.
(5) The Audit Committee may call for the comments of the auditors aboutinternal control systems,the scope
of audit,includingthe 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.

9. COMPARITIVE CHART ON SECTION 292A, CLAUSE 49, Section177OFNEW Companies ACT, 2013
Points Section 292A Clause 49 of Listing
Agreement
Section 177 of New
Companies Act, 2013
Applicability 5 crore or more paid-up
capital
3 Crore or more paid-
up or net worth of 2
crore or more
Every listed company
Composition Minimum three, in
which two-thirds of the
total number of
members shall be
directors, other than
managing or whole
time directors
Minimum three, all
being non-executive
directors with majority
of them being
independent
Similar to Clause 49
Financial literacy Nowhere mentioned At least one director
having financial and
accounting knowledge
Majority of members
of Audit Committee
including chairperson
shall be person with
ability to read and
understand financial
statements.
Terms of reference Audit committee shall
act in accordance with
the terms of reference
in writing by the Board
Listed out Enumerated therein but
a mirror image of
Clause 49 but enlarged
the scope to cover the
following areas:
• Approval or
modifications of
transactions with
related parties as
opposed to disclosure
as at present.
(6) The Audit Committee shall haveauthority to investigateinto any matter in relation to the items specified in
sub-section (4) or referred to it by the Board and for this purposeshall havepower to obtain professional
advicefrom external sources and have full access to information contained in the records of the company.
(7) The auditors of a company and the key managerial personnel shall havea rightto be heard in the meetings
of the Audit Committee when it considers the auditor’s reportbut shall nothavethe right to vote.
(8) The Board’s report under sub-section (3) of section 134 shall disclosethe composition of an Audit
Committee and where the Board had not accepted any recommendation of the Audit Committee, the same
shall bedisclosed in such reportalongwith the reasons therefor.
(9) Every listed company or such classor classes of companies,as may be prescribed shall establish a vigil
mechanismfor directors and employees to report genuine concerns in such manner as may be prescribed.
(10) The vigil mechanismunder sub-section (9) shall providefor adequate safeguards againstvictimisation of
persons who use such mechanismand make provision for directaccess to the chairperson of the Audit
Committee in appropriateor exceptional cases:
Provided that the details of establishmentof such mechanismshall bedisclosed by the company on its
website, if any, and in the Board’s report.

10. • Scrutiny of Inter-
corporate loans and
investments.
• Valuation of
undertakings or assets
of the Company where
ever it is necessary.
Attending meeting Internal auditors if any
and the director in
charge of finance shall
attend and participate
at meetings of audit
committee but shall not
have right to vote
Invitations to such
persons to attend the
meeting of the
committee as invitees.
Specifically mentions
about the right of
auditors and KMPs
(Key Managerial
Personnel)
Binding nature Shall record the reason
for non- acceptance of
recommendations and
communicate such
reasons to
shareholders.
This aspect is new in
respect of Clause 49
As similar to section
292A
Whistleblowing: nothing mentioned
regarding this aspect
Non-mandatory
requirement
Compulsory
establishment of vigil
mechanism
INDEPENDENCE OFAUDIT COMMITTEE
Section 292 A (1) of Companies Act, 195628
and Clause 49(II) (A) (i) of listing agreement provides
that two-thirds of the audit committee shall have independent directors, with a minimum of three
members, and the Chairman of the audit committee shall be independent director. Sub clause (iii) of
Clause 49 of Listing Agreements deals with the definition of independent directors and states that an
independent director shall mean a non-executive director of the company:
i. Who apart from receiving directors remuneration, does not have any material pecuniary
relationships or transactions with the company, its promoters, its directors, its senior
management29
or its holding company, its subsidiaries and associates30
which may affect
independence of the director
ii. Who is not related to promoters or persons occupying management positions at the board
level or at one level below the board;
iii. who has not been an executive of the company in the preceding three financial years;
28Inserted by the Companies (Amendment Act), Act, 2000 w.e.f. 13-12-2000
29As per explanation attached with clause49 (iii) ‘senior management’ shall mean personnel of the company
who aremembers of its core management team excludingBoard of Directors.Normally this would comprise
all members of management one level below the executive directors,includingall functional heads.
30As per explanation attached with clause49 (iii) Associateshall mean a company which is an asoosciateas
defined in AccountingStandards (AS) 23, ‘’Accounting for Investments in Associates in Consolidated Financial
Statements’, issued by the Institute of Chartered Accountants of India.

11. iv. who is not a partner or an executive or was not partner or an executive during the preceding
three years of any of the following:
 the statutory audit firm or the internal audit firm that is associated with the company;
 the legal and consulting firms that have a material association with the company.
v. who is not a material supplier, service provider or customer or a lessor or lessee of the
company, and
vi. who is not a substantial shareholder of the company owning two per cent or more of the block
of voting shares.
vii. who is not less than 21 years of age.
ROLE OFINDEPENDENT DIRECTORS IN AUDIT COMMITTEE
In brief the role of independent directors in Audit Committee is as follows:
 To look after the company’s financial reporting process and disclosure of its financial
information and recommend the Board of directors on the appointment, re-appointment and
replacement or removal of statutory auditor and fixation of audit fees.
 To review with management, the annual financial statements before approval by the board
with particular reference to Directors Responsibility Statement, changes in accounting policy,
major accounting estimates, audit finding adjustments, compliance with listing and other legal
requirements, disclosure of related party transactions and qualifications in draft audit report.
 To review the quarterly financial statements and review with management, performance of
statutory and internal auditors, adequacy of internal control system, adequacy of internal audit
function including their structure, frequency and reporting. To discuss on significant finding
of internal auditors, including internal investigations made by them into areas of fraud,
irregularities or major failures of internal control systems and further discusses with auditors
the scope of the audit.
 To review reasons for defaults into payments, reviewing the whistle blower mechanism.
 To review mandatorily Management Discussion and Analysis, related party transactions and
internal control weaknesses.
 To review financial statements of subsidiary companies with special attention to investment
made by them and review uses/application of funds from public issues, rights issues,
preferential issues etc.
 To disclose their shareholdings in the listed companies.
The composition of audit committee again ensures its independence and only this independence can
lead to transparency which can boost the investor confidence and provide a good corporate
governance system.
CONCLUSION ANDSUGGESTIONS

12. “Greater transparency about the workings of the audit committee will give greater confidence to
shareholders and other users of accounts”
-UK Institute of Chartered Accountants Deputy President, April 2002
The above quote truly speaks about the significance of audit committee among shareholders.
Transparency, accountability, responsibility and disclosure are four main pillars of corporate
governance. The audit committee plays a pivotal role in ensuring transparency, accuracy and probity
in accounts related matters. This committee that keeps checks and balances on audit related affairs on
which the investors can rely upon.
The role of independent non-executive directors in audit committee is highly significant. These are the
officials who can ensure the independence of the audit committee, which is required for ensuring
accuracy and transparency in accounting and audit related matters.
The role of Audit Committee in ensuring corporate governance cannot be ignored. Hence it is
suggested that
1. The Audit Committee should solely be comprised of Independent Directors so that the
independence of the audit committee can be ensured. Through this they can protect the
interest of the minority shareholders in particular and all other stakeholders in general. They
can ensure the effectiveness of the internal audit and oversight of the external auditors.
2. The Chairman of the Audit committee should possess the qualifications of Chartered
Accountant because he is having a specialized skill over audit and accounting procedures that
can bring and assure the accuracy, transparency and fairness in the accounting system of the
company.
3. The functions of the audit committee should be reviewed continuously for ensuring the
effectiveness of the committee for preventing accounting frauds. As held in the Smith Report
(UK) in January 2003, “Audit committees should, satisfy themselves that there is a proper
systemand allocation of responsibilitiesfor the day-to-day monitoring of financial controls
but they should not seek to do the monitoring themselves.” The reviewing authority should be
given to the shareholders in the Annual General Meeting. Since the ultimate owners of the
company are always the shareholders, this power should be solely vested with them to assure
transparency of performance of audit committee.
4. One of the members in the Audit committee should comprise an expert in legal matters to
bring awareness among internal as well as external auditors about the consequences of
negligence of duty in discharging their functions in accordance with the provisions of
Companies Act. This can minimize the accounting and audit related scams and frauds to a
certain extent.
5. The Board of directors should be made binding on all the recommendations set forward by the
audit committee so that the audit committee can act independently without fear or favor.
6. The discretion given to the board in the relevant provisions regarding the compliance of
recommendations of audit committee should be removed from Clause 49 of Listing
Agreement with a view to ensure the autonomy of audit committee.
7. Audit committee members and statutory auditors should be made liable and accountable for
any sort of audit and accounting failures and such other related scams which took place due to
the negligence of such members or auditors in course of their duty.
8. There should be stringent provisions to punish for non-compliance of the Section 177 of New
Companies Act, 2013.
9. The existing penal provision under Section 292A of the Companies Act, 1956 is very meager
and negligible, (one year imprisonment or Rs. 50,000 fine or both) hence it is recommended

13. that the existing penal provisions should be enhanced considerably with a view to prevent the
non-compliance of the provisions of the Act.