RETHINKING THE ROLE OF AUDIT COMMITTEES IN FINANCIAL STATEMENT APPROVAL: A CRITICAL ANALYSIS

INTRODUCTION:

As we approach the end of the financial year 2023-24, it's imperative to reflect on the functions and effectiveness of Audit Committees in ensuring the integrity of financial statements across listed and unlisted companies. Recent regulatory orders highlighting violations and limitations have sparked debates on the need for a reevaluation of their roles and responsibilities. In this article, we delve into the complexities surrounding Audit Committees and their pivotal role in confirming the "true and fair view" of financial statements.

REGULATORY FRAMEWORK:

The legal framework governing Audit Committees spans various statutes and regulations, including Section 177 of the Companies Act for both listed and unlisted companies, Reg 18 of the LODR for listed companies, and Section 134(5) concerning the Directors' Responsibility Statement.

DEPTH OF SCRUTINY:

The scrutiny of financial statements by Audit Committees, mandated to ensure compliance with accounting standards and the presentation of a "true and fair view," is under scrutiny itself. Despite legal mandates, challenges arise in the thorough examination of complex accounting issues, especially in companies with global operations and diverse subsidiaries.

PREPARATION AND APPROVAL PROCESS:

The process of preparing and approving financial statements involves coordination between management, auditors, and the Audit Committee. However, time constraints, coupled with the reliance on representations from management, raise questions about the depth of scrutiny exercised by Audit Committees.

CERTIFICATION DILEMMA:

The certification of a "true and fair view" often becomes a leap of faith, with directors receiving draft financial statements shortly before board meetings, limiting their ability to scrutinize thoroughly. Despite legal responsibilities, the certification process lacks substantial deliberation, primarily relying on management representations.

CHALLENGES AND OVERLOAD:

Audit Committees face a regulatory overload, tasked with responsibilities ranging from financial statement approval to compliance oversight and whistleblower complaints examination. This burden raises concerns about the practicality and effectiveness of their oversight role.

THE QUEST FOR SOLUTIONS:

Amidst these challenges, critical questions emerge regarding the allocation of managerial responsibilities, the ultimate accountability for financial statement integrity, and the adequacy of Audit Committee training. Additionally, the absence of a mandatory lead independent director raises questions about governance dynamics within Indian corporations.

CONCLUSION:

The effectiveness of Audit Committees in ensuring financial statement integrity demands introspection and reform. Addressing regulatory overload, enhancing Audit Committee training, and exploring the role of lead independent directors are crucial steps toward improving corporate governance. Without substantive debate and regulatory amendments, the certification of financial statements remains a precarious "leap of faith" for stakeholders tasked with upholding integrity.

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Article Compiled by:-

Mayank Garg

(LegalMantra.net Team)

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