Corporate governance has a very crucial role in ensuring transparency, accountability, and ethical operations in an organization. To enhance good governance practices and financial discipline, the Companies Act, 2013 brought on board several provisions that empower the independent oversight of the company operations. Among the most important of these is Section 177, concerned with the Audit Committee, which is an important tool of internal control and corporate honesty.
What is Section 177 of the Companies Act, 2013?
Section 177 requires certain companies to constitute an Audit Committee to supervise financial reporting, internal audits, and adherence to regulatory demands. The aim is to have a body that serves as an independent watchdog that would guarantee that the financial statements of a company reflect a true and fair picture and that internal operations of a company are working properly.
Applicability of Section 177
Section 177 applies to the following companies:
- All listed public companies; and
- Other public companies that meet any of the following criteria:
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- Paid-up share capital of ₹10 crore or more
- Turnover of ₹100 crore or more
- Aggregate, outstanding loans, or borrowings exceeding ₹50 crore
Private companies are generally not required to form an Audit Committee unless specifically directed under certain rules or by regulatory authorities.
Composition of the Audit Committee
Section 177 provides that the Audit Committee should be comprised of at least three directors with majority of them being independent directors. The independent director must also hold the position of the Chairperson of the committee, and the auditors and key managerial personnel of the company can be invited to attend the meetings when necessary.
Such a structure will guarantee the committee operates without partiality and that objective scrutiny of management resolutions and financial reporting is possible by independent members.
Functions and Responsibilities of the Audit Committee
The Audit Committee plays a critical role in maintaining corporate transparency and accountability. Its primary functions include:
- Reviewing Financial Statements: Examining quarterly and annual financial statements before submission to the board to ensure accuracy and compliance with accounting standards.
- Internal Control and Risk Management: Evaluating the company’s internal financial controls, risk management framework, and efficiency of internal audit systems.
- Auditor Oversight: Recommending the appointment, remuneration, and terms of appointment of statutory auditors and reviewing their independence and performance.
- Related Party Transactions: Approving or modifying related party transactions to prevent conflicts of interest.
- Whistleblower Mechanism: Overseeing a vigil mechanism for employees to report unethical practices or fraud within the organization.
Significance of Section 177
Section 177 lends credibility to the fact that the decision-making process is supported by transparency and accountability in companies. This reduces the chances of financial fraud, misreporting and misuse of company funds because the Audit Committee is enabled to play the role of an independent evaluator. It also increases the confidence of the investment, since the shareholders will be convinced that the financial health of the company is under close supervision.
Conclusion
Essentially, Section 177 of Companies Act, 2013 is one of the pillars of corporate governance in India. It supports the role of oversight, integrity and accountability in business operations. This section promotes ethical behavior among organizations by ensuring that they set up an Audit Committee to safeguard the interests of stakeholders and promote sustainable development by good financial management and transparency.
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Also Read: Audit Committee (Companies Act And Sebi)