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Governance Through Audit Committee and Internal Financial Control

Governance Through Audit Committee and Internal Financial Control. Presentation By CA Anil Sharma. More Governance Less Government. how much Government should do? Government to become a facilitator allow persons to manage their affairs diligently and in transparent manner and

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Governance Through Audit Committee and Internal Financial Control

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  1. Governance Through Audit Committee and Internal Financial Control Presentation By CA Anil Sharma

  2. More Governance Less Government • how much Government should do? • Government to • become a facilitator • allow persons to manage their affairs diligently and in transparent manner and • supervise from a distance through rules and regulations

  3. OECD Principles of Corporate Governance • the rights of shareholders, • The equitable treatment of shareholders, • The role of stakeholders in corporate governance, • Disclosure and transparency and • The role of the board of directors.

  4. The Role of the Board • Board members to act with due diligence and care in the best interest of the company. • Board to ensure compliance with applicable laws and take into account the interest of stakeholders. • Board to carry out all key functions: • Reviewing corporate strategy, risk policy, budgets, business plans and monitor performance. • Selecting, compensating key executives. • Monitor and manage potential conflict of interest of management including misuse of corporate assets and abuse of related party transactions

  5. Committees of the Board • Sec 177: Audit Committee, • Sec 178(1): Nomination and Remuneration Committee and • Sec 178(5) : Stakeholders Relationship Committee.

  6. Board Committees under SEBI Regulations • the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (issued on 2nd September, 2015) applicable after the expiry of 90 days from 2nd September, 2015. • Committees of the Board: • Audit Committee • Nomination and Remuneration Committee • Stakeholders’ Relations Committee • Risk Management Committee

  7. Audit Committee • Sec 177(1) The Board of Directors of every listed company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee. • In terms of Rule 6 of the Companies ( Meeting of Board and its Powers) rules, 2014, the following companies shall also have an Audit Committee: • (i) all public companies with a paid up capital of ten crore rupees or more; • (ii) all public companies having turnover of one hundred crore rupees or more; • (iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more.

  8. Composition of Audit Committee • Sec 177- The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority provided that majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial statement. • SEBI Regulations require two-thirds of the members of audit committee to be independent directorsand all members of audit committee to be financially literate and at least one member shall have accounting or related financial management expertise.

  9. Duties of Audit Committee • Sec 177(4) Every Audit Committee shall act in accordance with the terms of reference specified in writing by 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 audit process; • (iii) examination of the financial statement and the auditors’ report thereon;

  10. Rights of Audit Committee • The Audit Committee may call for the comments of the auditors about internal control systems, the scope of audit, including the 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.

  11. Duties of Audit Committee • Sec 177(4) Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include,— • (iv) approval or any subsequent modification of transactions of 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 controls and risk management systems; • (viii) monitoring the end use of funds raised through public offers and related matters.

  12. Rights of Audit Committee • (6) The Audit Committee shall have authority to investigate into any matter in relation to the items specified in sub-section (4) or referred to it by the Board and for this purpose shall have power to : • obtain professional advice from external sources and • have full access to information contained in the records of the company.

  13. Vigil Mechanism and Audit Committee • Every listed company or such class or classes of companies, as may be prescribed, shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed. • The vigil mechanism shall provide for adequate safeguards against victimisation of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases.

  14. Additional duties of Audit Committee under SEBI Regulations • As provided in Regulation 18 read with Part C of Schedule II to the Regulations: • oversight of the listed entity’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. • compliance with listing and other legal requirements relating to financial statements.

  15. Additional duties of Audit Committee under SEBI Regulations • To review • changes, if any, in accounting policies and practices and reasons for the same; • major accounting entries involving estimates based on the exercise of judgment by management; • significant adjustments made in the financial statements arising out of audit findings;

  16. Additional duties of Audit Committee under SEBI Regulations • To review the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit; • To review the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board;

  17. Additional duties of Audit Committee under SEBI Regulations • All related party transactions shall require prior approval of the audit committee. • Audit committee may grant omnibus approval for related party transactions proposed to be entered into by the listed entity subject to prescribed conditions. • the audit committee shall review, at least on a quarterly basis, the details of related party transactions entered into by the listed entity pursuant to each of the omnibus approvals given. • Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of one year.

  18. Additional duties of Audit Committee under SEBI Regulations • To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors; • The audit committee of the listed entity shall also review the financial statements, in particular, the investments made by the unlisted subsidiary.

  19. Penalty for contraventions relating to Audit Committee • The company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and • every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.

  20. Sec 134(5)(c)- Directors’ Responsibility Statement It shall state: • (e) the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.

  21. Meaning of Internal financial controls (IFC) ( Explanation to Sec 134(5)(e)) For the purpose of this clause, the term “IFC” means: • Policies and procedures adopted by the company for orderly and efficient conduct of its business including: • Safeguarding of its assets, • Prevention and detection of frauds and errors, • Accuracy and completeness of accounting records and • Timely preparation of reliable financial information.

  22. Rule 8 of the Companies (Accounts) Rules, 2014 • (5) …the report of the Board shall also contain – • . • . • . • (viii) the details in respect of adequacy of internal financial controls with reference to the Financial Statements.

  23. Meaning of Internal Financial Control with reference to Financial Statements (IFCOFR) It is a process designed to provide reasonable assurance regarding: • the reliability of financial reporting and • the preparation of financial statements for external (general) purposes in accordance with prescribed accounting standards and generally accepted accounting principles.

  24. IFC and IFCOFR reporting in directors’ Report • Section 134(5) – reporting on IFC applicable to a listed company. • Rule 8 –reporting on IFCOFR is applicable to • A listed company and • Avery other public company having a paid up share capital of twenty five crore rupees or more .

  25. Independent directors and IFC • Section 149(4)- Every listed company shall have at least 1/3rd to the total number of directors as independent directors… • Section 149(8)- The company and independent directors shall abide by the provisions specified in Schedule IV. • Schedule IV- Code for Independent Directors • II. Role and functions: • The independent directors shall: • (4) satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible;

  26. SEBI and IFCOFR "The CEO and the CFO shall certify that :" • They accept responsibility for establishing and maintaining internal controls for financial reporting and that they have evaluated the effectiveness of internal control systems of the company pertaining to financial reporting and they have disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of such internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies.

  27. SEBI and IFCOFR The CEO and the CFO shall certify that they have indicated to the auditors and the Audit committee: -1. significant changes in internal control over financial reporting during the year; -2. significant changes in accounting policies during the year and that the same have been disclosed in the notes to the financial statements; and -3. instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in the company’s internal control system over financial reporting.

  28. Rule 8 of the Companies (Accounts) Rules, 2014 • (4) Every listed company and every other public company having a paid up share capital of twenty five crore rupees or more calculated at the end of the preceding financial year shall include, in the report by its Board of directors, a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors.

  29. Penalties for non- compliance of section 134 • If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and • every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

  30. National Financial Reporting Authority (NFRA) • Section 132 Central Government to constitute, by notification, a Body with advisory role having quasi-judicial powers for ensuring compliance of matters relating to accounting and auditing standards under the Act. ANIL SHARMA

  31. Summing up • The Companies Act, 2013 has made several significant changes, which seek to redefine the board governance in India. • Audit Committees have been entrusted with new responsibilities to make their role more objective and purposeful. • The internal financial controls and risk management oversight of the boards have been strongly emphasised.

  32. THANK YOUContact me at:9811320203anil54@gmail.com

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