The Role and Functions of Audit Committees in the Indian Corporate Governance: Empirical Findings

Abstract

This paper examines the composition, focus and functions of audit committees (ACs), the effects of meetings and the criteria used in the selection of members by Indian listed companies from 73 questionnaire responses. The survey was carried out during February–March, 2002. The study reveals that so far only 56.2% of companies have established an AC despite the fact that it is now mandatory. Of those companies which have ACs, 68.3% have between three and six members on ACs. However, only 14.6% of companies have independent non‐executive directors on the committee, while 90.2% have non‐executive directors. This shows a lack of independent representation on the committees. The functions of ACs are quite diverse and are classified in three areas: financial statements and reporting, audit planning, and internal control and evaluation. The review of annual audited financial statements, discussion and recommendations of audit fees and review of the effectiveness of internal control were rated very highly by the respondents. The review of note disclosure and scope of external audit work are other important functions performed by ACs. The most important areas for focus are compliance with the standards and regulatory bodies, probing material items and undisclosed liabilities. However, there are statistical differences between medium and large sized companies in the performance of their role. The main criteria used for membership of an AC are: experience and knowledge of business, experience of holding similar positions and accounting and finance expertise. Ownership in the company was not perceived as an important criterion. The majority of companies’ AC meetings are held monthly or quarterly. MANOVA analysis reveals that the frequency of AC meetings has an effect on the internal control functions. The study concludes that the concept of an AC is not new in India but their formation is slow and their composition lacks independence. AC functions are still concentrated in the traditional areas of accounting and their role is not changing fast enough to make the corporate governance more effective.

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