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Evolution of Audit Committee In India - An Insight To The Various Recommendations And Reforms

Good corporate governance nurtures a system of transparent accountability. In the wake of various corporate scandals like Sahara, Satyam, Enron, both in India and around the globe, corporate governance gained its prominence with an eye of improving the financial scenario in the country by obtaining confidence of investors. The role of audit committee is very essential as it the way to ensure reliability on financial statements.

It is difficult for Board of the company to take every decision with due diligence and to give equal time and effort required, therefore the board delegates such authority, by forming various committees to take forward work which requires more experience, focus and technical decisions. Hence, the Board constitutes the Audit Committee which is constituted with an objective to ensure that a company produces relevant, adequate, and credible information for investors as well as independent observers for study to assess the performance of the company. It codifies the various management assumptions regarding the recognition of revenue and expenses, makes observation regarding whether these assumptions are in conformity with the established procedures and standards.

However, the Board is responsible for the actions of the committee as the roles and powers along with the structure of the same. Serving as an audit committee member is a rewarding experience and provides an opportunity to make a difference for a public company, its shareholders, and the investing public. The audit committee provides the working of internal as well as the external auditorsand ensures that all relevant disclosures are made as required by the law, and that the accounts give a full and accurate view of the financial status of the company.

Importance
An audit committee plays an important role for a company due to following reasons:
# Give noteworthy bits of knowledge to regulate and enhance Financial practices and detailing. In high-performing organizations, audit committees give oversight. Audit committees meet with the CEO and financial officers to audit and keep up viability of hierarchical controls and outer financial reporting. They frequently work in together with the finance committee, which is normally centered around inside reports, operational issues and financial methodology.

# Establish and keep up productive anti-fraud programs. With their experiences and skill in financial, legal, management and operational issues, audit committee members can assume a proactive job working with the NFP’s leadership team and auditors in making and intermittently evaluating an organization-wide fraud prevention and recognition program and guaranteeing that investigations are embraced if fraud is revealed. They can likewise support the organization’s leadership team to set up an extensive morals and consistence program. The audit committee should assume a comparably proactive role in the review and refresh of both programs.

# Improve the internal audit function. An organizational structure that has the internal audit team revealing specifically to the audit committee adds to the general respectability of the internal audit function. Under this structure, the internal audit team can fill in as the audit committee’s “eyes and ears” with respect to the organization’s ability to meet its financial and consistence obligations and guarantee that the organization alters practices and internal controls as required.

# Direct the organization’s external audit. An audit committee meets with external auditors to screen their administrations and exercises to guarantee that autonomy is kept up between the external auditor and the organization’s management team. An audit committee also meets with external auditors to talk about their independent perceptions on management’s capacity to keep up strong internal controls, appropriate financial reporting and sound business practices.

# Reinforce reliability with stakeholders. An NFP’s reputation is its most prominent resource. An audit committee conveys a message of independence, credibility and trust. It likewise constructs confidence among present and potential constituents, contributors, creditors, and other stakeholders. NFPs and their audit committees can maintain and further expand on this positive message by uncovering the audit committee’s role and composition, achieving transparency in financial disclosures, and communicating the organization’s compliance and ethics policy.[ii]

Role of Audit Committee

The role of the audit committee in a Company is decided by the Board of the company which includes the following:
# To provide oversight of the company’s financial reporting process and the revelation of its financial information to guarantee that the financial statement is right, adequate and believable.
# To help in prescribing the Board, the appointment, re-appointment and, whenever required, the substitution or expulsion of the statutory auditor and the fixation of audit fees.
# To Approve of payment to statutory auditors for any other services rendered by the statutory auditors.
# To prepare the annual financial statements with the help of management before accommodation to the board for approval, with specific reference to:
i. Matters which need to be incorporated in the Director’s Responsibility Statement to be included in the Board’s report;
ii. The changes, assuming any, in accounting policies and practices and purposes behind the equivalent;
iii. Main accounting entries ivolves estimating based on the acitivity of judgment by management;
iv. Significant adjustments made in the financial statements emerging out of audit findings;
v. Compliance with posting and other legal prerequisites relating to financial statements;
vi. Disclosure of any related party transactions;
vii. Qualifications in the draft audit report.

# To check on with the management, the quarterly financial statements before accommodation to the board for approval.
# Reviewing the statement of uses / application of funds raised through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes other than those stated in the offer document / prospectus / notice and the report submitted by the monitoring agency monitoring the utilization of proceeds of a public or rights issue, and making appropriate recommendations to the Board to take up steps in this matter.
# To review and monitor the auditor’s freedom and performance, and adequacy of audit process.
# To observe the approvals or any resulting alteration of transactions of the company with related parties.
# To investigate between corporate credits and ventures.
# To observe the valuation of endeavors or resources of the company, wherever it is important.
# To assess the inward financial controls and risk management framework.
# To review the performance of statutory and internal auditors, adequacy of the internal control systems, with the administration.
# To review the adequacy of internal audit function, including the structure of the internal audit department, staffing and rank of the official heading the department, reporting structure coverage and frequency of internal audit.
# To discuss with internal auditors of any huge discoveries and follow up there on.
# To review the findings of any internal investigations by the internal auditors into issues where there is suspected fraud or irregularity or a disappointment of internal control systems of a material nature and revealing the issue to the board.
# To discuss with statutory auditors before the audit begins, about the nature and extent of audit as well as post-audit discussion to find out any area of concern.
# To observe the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors.
# To audit the working of the Whistle Blower mechanism.
# To approve of appointment of CFO (i.e., the whole-time Finance Director or any other person heading the finance function or discharging that function) after evaluating the qualifications, experience and background, etc. of the candidate.
# To carry out any other function as is mentioned in the terms of reference of the Audit Committee.[iii]

Functions
a) Assist the Board in the execution of its oversight obligation regarding the monetary revealing procedure, arrangement of inside control, review procedure, and checking of consistence with pertinent laws, principles and directions;
b) Provide oversight over Management’s activities in managing credit, market, liquidity, operational, legal and other risks of the corporation. This function shall include regular receipt from Management of data on hazard exposures and hazard the executives exercises.
c) Review the annual internal audit plan to ensure its conformity with the objectives of the corporation. The plan shall include the audit scope, resources and budget necessary to implement it;
d) Before to the beginning of the external audit, to discuss with the external auditor, the nature, degree and expenses of the audit, and guarantee appropriate coordination if more than one audit firm is involved in the activity to secure proper coverage and minimize duplication of efforts;
e) Establish an internal audit function, and think about the arrangement of an independent internal auditor and the terms and conditions of its commitment and expulsion;
f) Monitor and evaluate the adequacy and sufficiency of the company’s internal control framework, including financial reporting control and information technology security;
g) Review the reports put together by the internal and external auditors;
h) Review the quarterly, half-year and annual financial statements before their accommodation to the Board Coordinate, monitor and encourage compliance with laws, rules and regulations;
j) Evaluate and decide the non-audit work, assuming any, of the external auditor, and review occasionally the non-audit fees paid to the external auditor in connection to their importance to the total annual income of the external auditor and to the corporation’s general consultancy costs. The committee shall forbid any non-audit work that will conflict with his obligations as an external auditor or may pose a danger to his independence. The non-audit work, whenever permitted, ought to be uncovered in the enterprise’s yearly report; and
k) Establish and recognize the reporting line of the Internal Auditor to empower him to appropriately satisfy his duties and obligations. He will practically report to the Audit Committee. The Audit Committee shall ensure that, in the execution of the work of the Internal Auditor, he shall be free from obstruction by outside parties.[iv]

Committee Reports On Audit Committee

The Sarbanes-Oxley Act of 2002 (SOX Act, hereafter) [v] that came into force in the U.S. within a year of the Enron debacle set in motion far-reaching changes in the regulations governing auditor independence and audit committees across the world with the aim to protect investors from fraudulent accounting practices of corporation. Also, SOX Act created a new board consisting of five members. All the accounting firms will have to register themselves with this board and submit inter alia particulars of fees received from public company clients for audit and non-audit services, financial information about the firm, list of the firm’s staff who participate in audit.

The board will establish rules governing audit, ethics and firm’s independence. In India, the beginning of the liberalization measures and the supplementary governance reforms that began in 1991 put great stress on the role of the external auditor and the audit committee. The Clause 49 Regulations[vi]that were made part of the Listing Agreement by the Securities Exchange Board of India (SEBI) in 2000 mandate every listed company to have an audit committee and specified detailed guidelines regarding its composition, role, and power.

The Naresh Chandra Committee (NCC, hereafter)[vii]that was instituted in August 2002 created a thorough report on the auditor-company relationship and the working of the audit committee. Many of these recommendations were unified in the Companies Bill of 2009.[viii]Later, the drafting of the Companies Bill, 2009, the Standing Committee on Finance submitted its “Report on The Companies Bill, 2009” on August 31, 2010 (MCA, 2010). The Bill was revised considering the recommendations and renamed as Companies Bill, 2012.[ix]

A. Rahul Bajaj’s report, 1991

Since the economic reforms of 1991, the Indian government and companies have sought to attract the attention of international investors. As part of its effort to compete in the global marketplace, where shareholder rights issues are becoming increasingly important to investors, India drafted its first code of best practice on April 19, 1997. The draft report, entitled Desirable Corporate Governance in India, was issued by the Confederation of Indian Industry (CII) and prepared by a 12-member group headed by Rahul Bajaj. The Bajaj Report, as the CII report is called, is analogous to codes of best practice in other countries, calling for the establishment of audit committees, a minimum number of nonexecutive directors appointed to boards, and greater disclosure from management on business and accounting issues.

The report makes several references that outshine the scope of other codes, such as director attendance requirements, limitations on the number of board seats held by directors and requiring that boards be accountable for a specific agenda of topics. The code fails to cover numerous other governance issues. The Bajaj Report’s achievement in recognizing the need for the establishment of audit committees, a minimum number of nonexecutive directors appointed to boards, and greater disclosure on management business and accounting issues was taken a step further when the Securities and Exchange Board of India (SEBI) convened a committee on corporate governance, also known as the Kumar Mangalam Birla Committee, in an attempt to improve the standard of corporate governance in India. Under the chairmanship of SEBI board member Kumar Mangalam Birla, the committee also made recommendations regarding board composition, audit committees, compensation committees, and shareholders committees and recommended that certain governance-related information be disclosed in annual reports. Furthermore, issues such as director independence and the establishment of remuneration committees, which were unaddressed by the Bajaj Report, are discussed and clarified under the Report of the Kumar Mangalam Birla Committee on Corporate Governance. SEBI accepted many of the recommendations set forth by the committee and consequently executed mandatory governance disclosure requirements. These recommendations were functional through an amendment to Clause 49 of the listing agreement of stock exchanges in India. In accordance with the listing agreement, most companies, depending on their size, have been required to adhere to certain governance disclosure requirements since March 31, 2001. Several other initiatives have been launched since that time. The Department of Company Affairs (DCA) established the Naresh Chandra committee to examine financial and non-financial disclosure, independent auditing, and board oversight of management. In addition, SEBI established the Narayana Murthy Committee to review Clause 49 and suggest improvements.

B. The Kumarmangalam Birla Committee, 1999

The Kumarmangalam Birla Committee on Corporate Governance constituted by the Securities and Exchange Board of India (SEBI) has made extensive recommendations on audit committee of its report, which are obligatory for companies whose shares are listed on stock exchange(s). The major aspects of these recommendations are enumerated below:
(a) Audit committee is one of the vital tools of corporate governance, which endorses a hierarchy of sound accountability and credibility in financial reporting and promotes confidence of share­holders and investors.

(b) Audit committee is widely known as an operational instrument for overseeing the financial reporting system.

(c) A qualified and independent audit committee should be instituted by the Board of Directors of a company. Independence is determined or influenced by the degree of economic or financial relationships of a director with the company, its management or any other director except right to remuneration for attending board meetings.

(d) Having regard to expertise and independence, an audit committee should have at least 3 (three) members, being non-executive directors, majority being independent, with at least one director possessing financial and accounting knowledge. Executives considered appropriate, finance director and, if required, a representative of the external auditor should be invited to meetings of the committee. The Company Secretary should be the Secretary to the committee.

(e) The audit committee should meet at least thrice every year, once every six months and once before finalization of annual accounts. The quorum should be a minimum of 2 (two) members or one- third of the members, whichever is higher, with two independent members.

(f) The powers of the audit committee, which originate from the Board’s authorization, include power to investigate any matter within the terms of reference, to obtain information from the records or any employee(s) of the company, to secure legal or other professional or expert advice, if required. [x]

C. The Naresh Chandra Committee Report, 2002

Having outlined the basic theory of corporate governance that will inform the recommendations of the Committee, the structure of the report:
It deals with the entire range of the statutory auditor-company relationship. The objective is to suggest ways of guaranteeing, and improving, the independent, professional nature of this key corporate governance link. Among other things, the chapter examines issues such as the rotation of audit firms versus that of auditing partners, restrictions on non-audit work and fees from such work, the procedure for appointment of auditors, determination of audit fees, and allied subjects. It also looks into measures that may be required to ensure that management and auditors in reality present the 'true and fair' statement of financial affairs of the company and, in light of section 302 of the SOX Act, whether it is compulsory to introduce measures such as CEO and CFO certification.

It also focuses on the issue of who audits the performance of auditors - and examines whether the current system of regulation of chartered accountants, company secretaries and cost and works accountants is suitable and has adequately served the interests of corporate shareholders and stakeholders. In this context, it analyses the need for setting up an independent regulatory body to oversee the quality of audit of public limited companies as has been done in the case of the Public Company Accounting Oversight Board prescribed by the SOX Act.[xi]

D. The Narayan Murthy Committee, 2002

It focused on responsibilities of audit committee, quality of financial disclosure, requiring boards to assess and disclose business risks in the company’s annual reports.[xii] It recommended only non-executive directors to be on the audit committee in contrast with the recommendation of the Naresh Chandra committee that preceded it which suggested only independent directors should be on audit committee. [xiii] Also, greater stress has been placed on the part of audit reports and audit qualifications. The result of consideration of this aspect has been that a specific duty is sought to be cast on the shoulders of the management. Therefore, the Committee has made a obligatory recommendation to the outcome that, in case a company has trailed a treatment diverse from that given in an accounting standard, then it is for the management to rationalize the need for such alternative treatment. The Committee necessitates the Management to clearly elucidate the alternative accounting treatment in the footnotes to the financial statements.

E. JJ Irani Committee, 2004

The present Committee was constituted on 2nd December, 2004 under the chairmanship of Dr. J J Irani, Director, Tata Sons, with the job of guiding the Government on the proposed revisions to the Companies Act, 1956. The objective of this exercise is supposed as the aspiration on the part of the Government to have a simplified compact law that will be able to address the variations taking place in the national and international scenario, permit adoption of internationally accepted best practices as well as provide adequate flexibility for timely development of new arrangements in response to the necessities of ever-changing business models. It is a welcome attempt to offer India with a modern Company Law to meet the requirements of a competitive economy. [xiv]

The Report comprising of thirteen chapters divided into seven parts addresses a range of issues including a viewpoint on the scope of Company Law, the matters concerned with classification and registration of companies, measures to make the governance in companies more accountable and transparent, measures to be taken in lieu of proper disclosure of related party transactions and minority interests, a comprehensive view on the variety of issues necessary for enabling protection of small investors, changes needed in the regime governing access to capital, maintenance of accounts and conduct of audit of companies, ways and means of creating the process of mergers and acquisitions more well-organized, effective investigation and prosecution for company offences with proper emphasis on officers in default and providing a model, balanced and effectual regime for addressing corporate insolvency. [xv]

F. Uday Kotak Committee, 2017
The Kotak Committee which was formed in June, 2017 under the chairmanship of Mr. Uday Kotak submitted its report on October 5th, 2017 specifying several recommendations on corporate governance. After inviting comments on such recommendations from the public and stakeholders, many of the recommendations were accepted by SEBI (some of them with certain modifications) at a meeting held on March 28th, 2018.

Some of the accepted recommendations were:
i. Fees to Statutory Auditors And Credentials Of Auditors
With respect to appointment/ reappointment of the statutory auditors, Annual General Meeting is required to include the following by a notice in the Explanatory Statement:
a) Proposed fees payable to statutory auditor(s) along with the terms of appointment and in case of a new auditor, any material changes in the fee payable to such auditor from that paid to the outgoing auditor with the rationale for such change.

b) Basis of recommendation for appointment includes the details in relation to and credentials of the statutory auditor(s) proposed to be appointed (Insertion of Clause 5 to regulation 36). The reason behind the introduction of these provisions is to guarantee that the shareholders make learned decisions on the appointment of statutory auditors of listed companies. Now, it has been laid down that the proposed fees must be released in the notice and if there is any change in the fees paid to a new auditor as compared to current audit fee, the justification for the same must be provided. Critically, it will lead to solicitation/ advertisement which is not in line with the ICAI/ or any of the corporate firm Code of Ethics which forbids a firm from marketing its credentials whether client wise, industry wise or in any other manner.

ii. Resignation of Auditor
Insertion of sub-clause 7A to schedule III of the listing regulations:
“In case of resignation of Auditor of the listed company, detailed reasons for resignation given by the said Auditor should be disclosed by the listed entities to the Stock Exchanges as soon as possible but after 24 hours of receipt of such from the Auditor”.

According to Section 140(2) of the Companies Act, 2013 the auditor who has resigned from the company shall file within a period of thirty days from the date of resignation a statement in the prescribed form with the company and the Registrar, and also in reference to Companies Act sub-section 139, the auditor shall also file such statement with the Comptroller and Auditor-General of India, stating the reasons and other facts as may be relevant with regard to his resignation. Rule 8 of the Companies (Audit & Auditors) Rule, 2014 lays down that when an auditor has resigned from the company, he shall file a statement in form ADT-3. But in the said amendment, the auditor doesn’t have to reveal the thorough explanations of change/ resignation even though as per the new regulations, in case of change, auditor is deemed to be a material event and disclosure is required to be made to stock exchanges. If an auditor resigns before the expiry of the term may be a cause for concern. As we discussed above that the listing regulations is mainly concern with the greater transparency and is required by the management, stakeholders and auditors. The listed entities are required to intimate the stock Exchange within 24 hours of receipt of Resignation of the Auditor.

iii. Audit Qualifications
The Existing Clause BB of Schedule IV (Disclosures in Financial Results) of the Listing Regulations has been substituted by the following.
The management shall mandatory make an estimate which the auditor shall review and report accordingly. Notwithstanding the above, the management may be permitted to not provide estimate on matters like ongoing concerns or sub judice matters, in which case the management shall provide the reasons and the auditor shall review the same and report accordingly.
The amendments relate to Audit Qualification where the Impact of qualification is not quantifiable. In the Existing listing Regulations, the Management was required to make an estimate and the auditor was required to evaluate and report accordingly where effect of qualification is not quantifiable. An amendment has been made to clarify that the management is permitted to not provide estimate on matters like ongoing concerns or sub judice matters in which case the management shall provide the reasons for it and the auditor shall review the same report accordingly.

iv. Enhanced Role of Audit Committee
The Role of Audit Committee has been enhanced to review the utilization of loans and/or advances from/investment by the holding company in the subsidiary exceeding Rupees 100 crores or 10% of the asset size of the subsidiary whichever is lower including existing loans/advances/investments existing as on the date of coming into force of this provision (Insertion of a new sub-clause 21 in Part C Clause A of Schedule II of Listing Regulations relating to Corporate Governance).

This time Uday Kotak Committee on Corporate Governance added further responsibility on the Audit Committee to review utilization funds of the listed entity imparted in unlisted subsidiary including foreign subsidiaries. The fixed limits are to certify that the Audit Committee review only such loans and/or advances as significant. [xvi]

Legislative Evolution

A. Company Act, 1956: Section 292A[xvii]stated that Audit Committee was required to be formed for a public company with paid up capital was Rs 5 crore or more. The act left on the board to decide the powers and roles of the committee and therefore, the act was silent on such references. Under section 292A (8), the recommendations of the committee were binding on the board. Along with the abovementioned provisions, section 292A (6), it was mandatory for the committee to have periodic discussion with the auditors regarding the compliance of internal control system and to observe the financial statements of the company.

B. Companies (Amendment) Act, 2000: The necessity related to audit committee was introduced in the Companies (Amendment) Act, 2000.

C. Company Act,2013: Section 177 of the Companies Act, 2013 [xviii] (“the Act”) read with Rule 6 and 7 of Companies (Meetings of Board and its Powers) Rules, 2014[xix](“the Rules”) deals with Audit Committee. Audit committee is a measure of certifying self -discipline, established with the motive to reinforce and supervise management in public companies and to ensure that the board of directors discharge their functions effectively. The Companies Act, 2013 recognizes the importance of an audit committee and delegates it with additional roles and responsibilities. [xx]

Composition of Audit Committee as per company act 2013

i. The Audit Committee must comprise of minimum three directors within dependent directors making a majority.
ii. Members of Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial statement.
iii. The Board’s report under section 134(3) of the Act must be disclose the composition of an audit committee and if the Board had not accepted any recommendations of the Audit Committee, the same must be disclosed in the report with the reasons for not accepting the same.

Reconstitution of Audit Committee as per company act 2013:In term of section 177(3) of the Act, every company which was required to constitute an audit committee under section 292A of the Companies Act, 1956 is required to reconstitute the audit committee within one year of such commencement of the Rules or appointment of Independent Directors, whichever is earlier. (i ,e., on or before 31stMarch 2015).

D. SEBI (LODR), 2015-Regulation 18 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, deals with the composition of audit committee along with it, it specifies the qualification of the members i.e. all members must be financial literate where at least one of them must be an expert of financial management. [xxi]

In furtherance to bring transparency to the functioning of audit committee, amendment act of 2018 plays a major role where the amendment includes the review of application made by the subsidiary company out of loans and/ or advances /investment made by the holding company. The threshold will be applied in cases where the aggregate amount exceeds rupees 100 crore or 10% of the asset size of the subsidiary, whichever is lower & will include existing loans / advances / investments existing as on the date of coming into force of this provision. In case company has subsidiaries, it will be mandatory to publish quarterly consolidated financial statements with a condition that at least eighty percent of consolidated revenue, assets and profits should have been audited or reviewed. Moreover, in the last quarter of the financial year, if material adjustments have been made which relate to earlier period will have to be disclosed. Cash flow statements are required to be made and disclosed as part of its standalone and consolidated financial results every six months. [xxii]

E. Companies Amendment Act, 2017:Various amendments were brought under the amended act.Earlier, in the Act of 2013 the term used in section 177 was ‘the listed companies’ which includes the private companies who had listed its debt instruments as per the SEBI guidelines. For this issue, in the amended act, the term ‘the listed companies’ had been substituted by ‘the listed public companies.’ [xxiii]

F. NFRA: This body was constituted under section 132 of Companies Act, 2013 which was brought into effect on 1stOctober, 2018[xxiv]with an objective of establishing an independent body to assist in forming legislations related to accounting and auditing. In addition to this, it was established with a motive to improve investors and public confidence in the business entity. The National Financial Reporting Authority Rules, 2018[xxv]were enacted on 13thNovember 2018 to assist in establishing the authority.

Audit Committee Failure

A. Toshiba - a case of internal audit failure

Toshiba, a 140-year-old pillar of Japan Inc, is caught up in the nation's biggest accounting scandal since 2011. In 2011, Olympus Corp was involved in a scandal. In July 2015,ToshibaCorp president Hisao Tanaka and his two ancestors quit after agents found that the company expanded its profit by at least $1.2 billion amid the period 2009-2014.Toshibais one of the early adopters of the corporate governance reforms started in Japan. The corporate governance structure satisfied corporate governance standards. Over and over cases of corporate governance failures have given proof that good corporate governance structure does not really prompt to good corporate governance. Association culture is a basic determinant of nature of corporate governance.

Some of the observations of the independent investigation committee of the company oninternalauditdemand discussion and debate.

The investigation committee observes, "As per the division of obligations tenets of Toshiba, the corporate audit division is responsible for evaluating the corporate divisions, the organizations, branch organizations, and partnered organizations. Be that as it may, in all actuality the corporate audit division chiefly given consultation services to the 'administration' being completed at every one of the organizations, and so on (as a major aspect of the business activities audit), and it once in a while directed any administrations from the point of view of a bookkeeping review into regardless of whether a bookkeeping treatment was suitable."

The perceptions of the committee give the impression that the fault of theinternal auditinToshibawas that it centered around consultation service rather than assurance service. In Toshiba, the top management used to set targets that are unachievable. There was excessive pressure from the top management to accomplish those objectives. The variable pay is a critical part of the total pay..The remuneration of official officers includes a base pay dependent on title and a job pay dependent on work content. 40% to 45 percent of the job remuneration depends on execution of the general organization or business division. 'Test' to accomplish unachievable targets and execution-based pay give enough inspiration to oversee income. In this way, accounting audit ought to have been a center region for internal audit.

Internal audit can work freely only if the audit committee is capable, autonomous and powerful, and the internal auditor reports to the audit committee.

In Toshiba, the audit committee was neither proficient nor free. The three outer members of the audit committee had no knowledge of money and bookkeeping. An ex-Chief Financial Officer (CFO), who was the CFO amid the time allotment when accounting inconsistencies happened, was the only whole-time member of the audit committee. Therefore, the internal audit was not independent of the administration. Earnings management had the implied endorsement of the top management. Therefore, it is not astonishing that accounting audit was rejected from the extent of internal audit. It is incorrect to infer that the accounting audit did not get the consideration of the internal audit because its attention was on providing consultation service. Contemporary literature characterizes internal audit as 'assurance and consulting service'. The issue is of adjusting between consultation service and assurance service. Issue emerges when the internal auditor forgets that the internal audit is fundamentally a confirmation work. The consultation service streams from the assurance service.

Despite of the fact that, the primary target of operation audit is to obtain affirmation that the internal control that is introduced to achieve operation objectives is satisfactory and working adequately, the auditees look to the internal auditor for suggestions and consultancy. Such consultation service is a by-product of the assurance service. Auditees should not be denied the benefits of internal auditor's understanding of the industry and the business, and the challenges before the auditees in achieving operation objectives. Avoidance of consultation service from the extent of internal audit would result in problematic usage of internal audit resources.

Organization culture likewise decides the adequacy of internal audit. The investigation committee observes, "A corporate culture existed at Toshiba whereby employees could not act in opposition to the expectation of their bosses ". In such a culture an upstanding internal auditor cannot survive, particularly if he is not free of the management. Perhaps, it is the reason that the internal audit in Toshiba had picked the simple way of concentrating on 'consultation service' just without revealing internal control weaknesses. Internal auditor is the 'eyes and ears' and 'go-to man' of the audit committee. Therefore, internal audit failure leads to corporate governance failure.[xxvi]


B. Satyam Computers Services Ltd.
The case of Satyam Computers Services Ltd is an example of corporate failure in India where audit committee played the major role in the scam. The Company failed every pillar of corporate governance and deceived authorities like SEBI, Registrar of Companies and other authorities. One of the best audit company- Pricewaterhouse Coopers, audited the books of the said company for ten years but failed to take into due diligence regarding the frauds as it never verifies the forged statements with the bank and debtors etc. The audit committee did not take any step in curbing the malpractices in the company and failed to recognize fraudulent activities.[xxvii]After this scam, the SEBI amended clause 49 of Listing Agreement to improve corporate governance.

Conclusion
For improving the effectiveness of the audit committee, we need to lay down a comprehensive code of conduct and rules and regulations. The suggested best practices are:
# Minimum financial qualification and functional experience recommended for eligibility to be an audit committee member should be raised from just comprehensive knowledge of financial statements where only the Chairman is required to be an expert in the committee.
# There should be a minimum of six audit committee meetings in a year—two meetings devoted to evaluating the thorough control environment and risk management related matters comprehensively;
# There must be a check on the maximum number of audit committees a person can be a member of;
# The audit committee meetings to be held at least a day before the board meeting, to allow for enough time to deliberate and discuss key issues;
# Appointment of the audit committee should be done through a well-defined selection procedure and should not be done by the chairman or board or promoters;
# The tenure of the audit committee membership should be evidently defined, and a transparent succession planning process must be there; and
# The appointment of internal auditors and their reporting should be done by and to the audit committee.[xxviii]

End-Notes
[i] 3rdYear, Corporate laws, UPES
[ii] AICPO,five reasons your organization needs an audit committee, ( last visited on 21 Feb., 2019)https://www.aicpa.org/interestareas/notforprofit/resources/governancemanagement/five-reasons-your-org-needs-an-audit-committee.html-
[iii] Audit Committee,(last visited on 19thFeb, 2019),https://finapp.co.in/audit-committee/-
[iv] More on the Functions of the Audit Committee(last visited on 18thFeb., 2019), http://www.dnl.com.ph/2-uncategorised/59-more-on-the-functions-of-the-audit-committee
[v] Sarbanes-Oxley Act of 2002, http://www.law.uc.edu/ccl/soact/toc.html
[vi] Securities and Exchange Board of India (SEBI), Clause 49 Regulations, Circular No. SEBI/CFD/DIL/CG/1/2004/12/10 October 29, 2004. http://www.sebi.gov.in
[vii] Naresh Chandra Committee Report on Corporate Audit and Governance (2002), http://www.nfcgindia.org/library.htm
[viii] The Companies Bill of 2009, http://www.mca.gov.in/Ministry/actsbills/pdf/ Companies_Bill_2009 _24 Aug2009.pdf
[ix] Jayati Sarkar and Subrata Sarkar, State of Auditor and Audit Committee Functioning in India, NSE ( last visited 21 Feb., 2019), https://nse-india.com/research/content/CECG_R1.pdf
[x] Roshanali.B.,Essay on Audit Committee | India | Auditing, ( last visited on 21 Feb, 2019),http://www.accountingnotes.net/essay/audit-committee/essay-on-audit-committee-india-auditing/14797
[xi] R.Kannan,Indian Banking Today & Tomorrow, Report of Naresh chandra Committee on Corporate Governance, ( Last visited on 21 Feb., 2019),http://www.oocities.org/kstability/inbank/corpgovern/dca.html
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[xiii] Maverick,Discuss the Recommendations of the Narayan Murthy Committee on Corporate Governance,( Last visited on 21 Feb, 2019), https://mvk1985.wordpress.com/2015/01/24/discuss-the-recommendations-of-the-narayan-murthy-committee-on-corporate-governance-200-words/
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[xvi] Agam H Maloo,Implications of Kotak Committee Report on Corporate Governance in India,( last visited on 21 Feb, 2019), https://blog.ipleaders.in/kotak-committee-report/
[xvii] The Companies Act, 1956, http://www.mca.gov.in/Ministry/actsbills/pdf/Companies_Act_1956_Part_1.pdf.
[xviii] The Companies Act, 2013, http://www.mca.gov.in/SearchableActs/Section177.htm.
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[xxi] https://www.corporate-cases.com/2016/10/regulation-18-of-sebi-lodr-audit-committee.html.
[xxii] http://www.lawstreetindia.com/experts/column?sid=247.
[xxiii] Highlight of Companies Bill2017https://www.icsi.edu/media/webmodules/Highlights_CompaniesABill_2017_191217.pdf.
[xxiv] http://ebook.mca.gov.in/Default.aspx?page=notification.
[xxv] http://ebook.mca.gov.in/Default.aspx?page=notification.
[xxvi] Toshiba-a-Case-of-Internal-Audit-Failure(last visited on 20thFeb. 2019) https://www.business-standard.com/article/opinion/toshiba-a-case-of-internal-audit-failure-115080900760_1.html.
[xxvii] Arpit Khurana,Corporate Governance: - A Case Study Of Satyam Computers Services Ltd, (last visited on 20thFeb, 2019),http://www.srjis.com/pages/pdfFiles/147367354829.%20ARPIT%20KHURANA.pdf.
[xxviii] FE Bureau, Improving the effectiveness of the audit committee, ( Last visited on 21 Feb.,2019), https://www.financialexpress.com/opinion/improving-the-effectiveness-of-the-audit-committee/1208159/

Written By:Meha dad and Akshita Agrawal

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