A. Training of Directors
(i) The companies should ensure that directors are inducted through a suitable familiarization process covering, inter alia, their roles, responsibilities and liabilities. Efforts should be made to ensure that every director has the ability to understand basic financial statements and information and related documents/papers. There should be a statement to this effect by the Board in the Annual Report.
(ii) Besides this, the Board should also adopt suitable methods to enrich the skills of directors from time to time.
B. Enabling Quality Decision making
The Board should ensure that there are systems, procedures and resources available to ensure that every Director is supplied, in a timely manner, with precise and concise information in a form and of a quality appropriate to effectively enable/discharge his duties. The Directors should be given substantial time to study the data and contribute effectively to Board discussions.
C. Risk Management
(i) The Board, its Audit Committee and its executive management should collectively identify the risks impacting the company’s business and document their process of risk identification, risk minimization, risk optimization as a part of a risk management policy or strategy.
(ii) The Board should also affirm and disclose in its report to members that it has put in place critical risk management framework across the company, which is overseen once every six months by the Board. The disclosure should also include a statement of those elements of risk, that the Board feels, may threaten the existence of the company.
D. Evaluation of Performance of Board of Directors, Committees thereof and of Individual Directors
The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. The Board should state in the Annual Report how performance evaluation of the Board, its committees and its individual directors has been conducted.
E. Board to place Systems to ensure Compliance with Laws
(i) In order to safeguard shareholders’ investment and the company’s assets, the Board should, at least annually, conduct a review of the effectiveness of the company’s system of Internal controls and should report to shareholders that they have done so. The review should cover all material controls, including financial, operational and compliance controls and risk management systems.
(ii) The Directors’ Responsibility Statement should also include a statement that proper systems are in place to ensure compliance of all laws applicable to the company. It should follow the “comply or explain” principle.
(iii) For every agenda item at the Board meeting, there should be attached an “Impact Analysis on Minority Shareholders” proactively stating if the agenda item has any impact on the rights of minority shareholders. The Independent Directors should discuss such Impact Analysis and offer their comments which should be suitably recorded.
AUDIT COMMITTEE OF BOARD
A. Audit Committee - Constitution
The companies should have at least a three-member Audit Committee, with Independent Directors constituting the majority. The Chairman of such Committee should be an Independent Director. All the members of audit committee should have knowledge of financial management, audit or accounts.
B. Audit Committee - Enabling Powers:
(i) The Audit Committee should have the power to -
- have independent back office support and other resources from the company;
- have access to information contained in the records of the company; and
- Obtain professional advice from external sources.
(ii) The Audit Committee should also have the facility of separate discussions with both internal and external auditors as well as the management.
C. Audit Committee - Role and Responsibilities
(i) The Audit Committee should have the responsibility to—
- monitor the integrity of the financial statements of the company;
- review the company’s internal financial controls, internal audit function and risk management systems;
- make recommendations in relation to the appointment, reappointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor;
- review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit process.
(ii) The Audit Committee should also monitor and approve all Related Party Transactions including any modification/amendment in any such transaction.
(iii) A statement in a prescribed/structured format giving details about all related party transactions taken place in a particular year should be included in the Board’s report for that year for disclosure to various stakeholders.
AUDITORS
A. Appointment of Auditors
(i) The Audit Committee of the Board should be the first point of reference regarding the appointment of auditors.
(ii) The Audit Committee should have regard to the profile of the audit firm, qualifications and experience of audit partners, strengths and weaknesses, if any, of the audit firm and other related aspects.
(iii) To discharge its duty, the Audit Committee should:
- discuss the annual work programme and the depth and detailing of the audit plan to be undertaken by the auditor, with the auditor;
- examine and review the documentation and the certificate for proof of independence of the audit firm, and
- recommend to the Board, with reasons, either the appointment/re-appointment or removal of the statutory auditor, along with the annual audit remuneration.
B. Certificate of Independence
(i) Every company should obtain a certificate from the auditor certifying his/its independence and arm’s length relationship with the client company.
(ii) The Certificate of Independence should certify that the auditor together with its consulting and specialized services affiliates, subsidiaries and associated companies or network or group entities has not/have not undertaken any prohibited non-audit assignments for the company and are independent vis-a-vis the client company.
C. Rotation of Audit Partners and Firms
(i) In order to maintain independence of auditors with a view to look at an issue (financial or non-financial) from a different perspective and to carry out the audit exercise with a fresh outlook, the company may adopt a policy of rotation of auditors which may be as under:—
- Audit partner - to be rotated once every three years
- Audit firm - to be rotated once every five years.
(ii) A cooling off period of three years should elapse before a partner can resume the same audit assignment. This period should be five years for the firm.
D. Need for clarity on information to be sought by auditor and/or provided by the company to him/it
(i) With a view to ensure proper and accountable audit, there should be clarity between company management and auditors on the nature and amount of information/documents/records etc and periodicity/frequency for supply/obtaining such information/documents/records etc.
(ii) In any case the auditor concerned should be under an obligation to certify whether he had obtained all the information he sought from the company or not. In the latter case, he should specifically indicate the effect of such non receipt of information on the financial statements.
E. Appointment of Internal Auditor
In order to ensure the independence and credibility of the internal audit process, the Board may appoint an internal auditor and such auditor, where appointed, should not be an employee of the company.
SECRETARIAL AUDIT
Since the Board has the overarching responsibility of ensuring transparent, ethical and responsible governance of the company, it is important that the Board processes and compliance mechanisms of the company are robust. To ensure this, the companies may get the Secretarial Audit conducted by a competent professional. The Board should give its comments on the Secretarial Audit in its report to the shareholders.
INSTITUTION OF MECHANISM FOR WHISTLE BLOWING
(i) The companies should ensure the institution of a mechanism for employees to report concerns about unethical behaviour, actual or suspected fraud, or violation of the company’s code of conduct or ethics policy.
(ii) The companies should also provide for adequate safeguards against victimization of employees who avail of the mechanism, and also allow direct access to the Chairperson of the Audit Committee in exceptional cases.
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