Audit Committee (AC) is one of the most important committees of the Board. It is expected to perform a number of vital functions. However, a number of ACs are reportedly underperforming on account of a variety of reasons. These include –

• Composition of the AC – Audit Committee has a variety of roles and responsibilities assigned to it. For it to function effectively, its composition has to be strong. Long tenures of members of the AC, and the impact on their true independence, owing to their long tenures, may impact adversely on the independence of the AC. Further, a number of Board members are not comfortable with becoming members of the AC. This too can lead to a suboptimal composition of the committee.
• Chair of AC – The leadership of AC decides the effectiveness of the committee. The Chair should be a financial expert, and should also be able to provide effective leadership. Further, the tenure of the AC chair should not be so long as to prevent him/her from being objective.
• Duration of AC meetings – Most AC meetings are held on the same day as the Board meeting. This may artificially cut short the duration of the committee meeting, thereby preventing meaningful discussions from taking place.
• Agenda and agenda notes – Unless a proper agenda, along with agenda notes, complete in all respects, is sent to the AC in advance, the deliberations cannot be meaningful. Tabled items, as is the case in a number of companies, prevents meaningful discussions.
• Quality of audit – The quality of audit in a number of companies has come under the scanner. Over the years, an increase in the number of disclaimers has also adversely impact on the quality of audit.
• Related Party Transactions (RPTs) – One of the major roles of ACs is to approve RPTs. However, most ACs agree with what the management presents, and do not question any transaction. This may result in RPTs, which are not in the interest of the company, getting passed. Time is also a constraint that gets in the way of a deep dive into RPTs by the AC.
• Interaction with auditors- It has been established that ACs should interact with both Statutory Auditors and Internal Auditors, without the presence of management, to understand any observations/ concerns that they may have. However, many ACs have not adopted this practice.
• Number of meetings – While law and regulations mandate a minimum of 4 meetings in a year for AC, it is well established that companies should have at least 2 more off cycle meetings, to discuss non-audit related matters. However, not many companies follow this.
• Increase in scope of work of AC – With each amendment to law/ regulations, the scope of activities under AC is increasing. Further, there is a tendency for Boards to give AC a number of additional tasks. With most committees having a limited number of meetings, and that too for limited duration, this can result in suboptimal discussions.
• Liability – The liability for AC members prevents a number of Directors from accepting a position as a member of the AC.