Audit Committee under the Companies Act, 2063

Question: How is an audit committee formed under the Companies Act, 2063? Explain its functions, duties, and powers.

1. Formation of the Audit Committee

Section 164 of the Companies Act, 2063 of Nepal provides for the formation of an audit committee to strengthen financial governance, internal control, and accountability within companies.

A listed company with paid-up capital of NPR 30 million or more, or a company wholly or partially owned by the Government of Nepal, must form an audit committee with the following arrangements:

1. Composition: The committee must consist of at least three members.

2. Chairperson: The committee must be chaired by a director who is not involved in the company's day-to-day operations or management.

3. Independence: A close relative of the company's chief executive officer cannot be a member of the committee.

4. Professional expertise: At least one member must either hold a professional accounting qualification and have relevant experience or possess at least a bachelor's degree in accounting, commerce, management, finance, or economics, together with experience in accounting and finance.

5. Meetings and internal procedures: The committee meets as required and may regulate its own internal procedures.

6. Resources: The company must provide adequate resources to enable the committee to perform its responsibilities effectively.

7. Implementation of recommendations: The board of directors must implement the committee's recommendations concerning the company's accounting and financial arrangements.

2. Functions, Duties, and Powers of the Audit Committee

The major functions, duties, and powers of the audit committee are as follows:

1. Review of financial statements: To review the company's accounts and financial statements and verify the accuracy and reliability of the information presented in them.

2. Review of internal controls and risk management: To examine the company's internal financial control system and risk management arrangements.

3. Supervision of internal auditing: To supervise and review the company's internal audit activities and assess their effectiveness.

4. Recommendation for appointment of an external auditor: To recommend potential auditors for appointment, determine their remuneration and terms of appointment, and submit these matters to the general meeting for approval.

5. Monitoring compliance by auditors: To oversee and review whether the company's auditor complies with the applicable codes of conduct, standards, and guidelines prescribed by the competent regulatory authority while conducting an audit.

6. Formulation of auditor selection policies: To establish policies for the appointment and selection of auditors in accordance with the applicable laws, standards, codes of conduct, and guidelines.

7. Formulation of accounting policies: To formulate and ensure the implementation of the company's accounting policies.

8. Compliance with regulatory reporting requirements: To ensure that the necessary requirements are fulfilled for preparing detailed disclosures in audit reports where such disclosures are prescribed by a regulatory authority.

9. Other assigned responsibilities: To perform other functions relating to the company's accounts, financial arrangements, and auditing as assigned by the board of directors.

Conclusion

The audit committee is an important mechanism for promoting financial discipline, effective internal control, and accountability within a company. It reviews financial statements, oversees internal auditing and risk management, and monitors the appointment and performance of auditors.

To ensure the committee's independence and effectiveness, companies should appoint qualified members, prevent conflicts of interest, provide adequate resources, and implement its recommendations. An effective audit committee contributes to reliable financial reporting, stronger corporate governance, and greater stakeholder confidence.

Company Act 2063, Audit Committee, Corporate Governance, Financial Accountability, Loksewa, Section Officer