The key issues debated by the Committee and the related recommendations are discussed below.

The Committee noted that the recommendation in the Birla Committee Report cast a responsibility on the audit committee vis-à-vis their duties and role. Further, the compliance report of the Mumbai Stock Exchange showed that approximately only 53% of the companies complied with this requirement contained in the Birla Committee Report. In view of the above deliberations, the Committee makes the following mandatory recommendation.

Mandatory Recommendation:
Audit committees of publicly listed companies should be required to review the following information mandatorily:

1. Financial statements and draft audit report, including quarterly / half-yearly financial information;

2. Management discussion and analysis of financial condition and results of operations;

3. Reports relating to compliance with laws and to risk management;

4. Management letters / letters of internal control weaknesses issued by statutory/ internal auditors; and

5. Records of related party transactions.

Suggestions were received that all audit committee members should be "financially literate" and at least one member should have accounting or related financial management expertise. The Committee accepted this suggestion. . It was also of the view that the definition of the phrase "financially literate" should be explained further. Based on the above discussions, the Committee accordingly makes the following mandatory recommendation

Mandatory Recommendation:
All audit committee members should be "financially literate" and at least one member should have accounting or related financial management expertise.

Explanation 1 - The term "financially literate" means the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows.

Explanation 2 - A member will be considered to have accounting or related financial management expertise if he or she possesses experience in finance or accounting, or requisite professional certification in accounting, or any other comparable experience or background which results in the individual's financial sophistication, including being or having been a chief executive officer, chief financial officer, or other senior officer with financial oversight responsibilities.

The Committeee has made the following two recommendations.

The Committee noted that accounting policies and principles are selected by a company's management. Consequently, the onus should be on management to explain why they believe such alternative treatment is more representative of the underlying business transaction. The auditor's responsibility is to express a qualification in case he disagrees with the explanation given by the company's management. The responsibility should not be cast on the auditor to justify such departures from an accounting standard. The members were of the view that the auditor may either concur or disagree with management's viewpoint. The auditor may draw reference to this footnote without necessarily making it the subject matter of an audit qualification, unless he disagrees with the departure from the accounting standard, in which case he would be required to issue a qualification. The Committee therefore makes the following mandatory recommendation

Mandatory Recommendation:
In case a company has followed a treatment different from that prescribed in an accounting standard, management should justify why they believe such alternative treatment is more representative of the underlying business transaction. Management should also clearly explain the alternative accounting treatment in the footnotes to the financial statements.

Based on discussion, the Committee makes the following recommendation:

Non-mandatory Recommendation:
Companies should be encouraged to move towards a regime of unqualified financial statements. This recommendation should be reviewed at an appropriate juncture to determine whether the financial reporting climate is conducive towards a system of filing only unqualified financial statements.

The Committee noted that a statement disclosing the basis / methodology for various types of transactions entered into with related parties should be prepared and submitted for the information of the audit committee. It also opined that this statement should include transactions which are not on an arm's length principle. The company's management should explain to the audit committee the reasons for the non-arm's length nature of the transaction. The Committee also noted that the definition of "arm's length" should be clarified in the recommendation. It noted that a reference may be made to the report of the Department of Company Affairs' Expert Group on Transfer Pricing Guidelines for a suitable definition. Based on the above discussions, the Committee accordingly makes the following mandatory recommendation

Mandatory Recommendation:
A statement of all transactions with related parties including their bases should be placed before the independent audit committee for formal approval / ratification. If any transaction is not on an arm's length basis, management should provide an explanation to the audit committee justifying the same.

The Committee noted that Accounting Standard 18, Related Party Transactions ("AS 18") issued by the ICAI contained the definition of this term. Based on discussion, the Committee adopted the definition of "related party" as set out in AS 18 and makes the following mandatory recommendation

Mandatory Recommendation:
The term "related party" shall have the same meaning as contained in Accounting Standard 18, Related Party Transactions, issued by the Institute of Chartered Accountants of India.

The Committee believes that it is important for corporate Boards to be fully aware of the risks facing the business and that it is important for shareholders to know about the process by which companies manage their business risks. In light of this, it was suggested that procedures should be in place to inform Board members about the risk assessment and minimization procedures. These procedures should be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework. These risks will include global risks; general, economic and political risks; industry risks; and company specific risks.

It was also suggested that management should place a report before the Board every quarter documenting any limitations to the risk taking capacity of the corporation. This document should be formally approved by the Board. The Committee believes that this recommendation is important. This is because the Management Discussion, and Analysis of Financial Condition and Results of Operations, are the responsibility of a company's management. It is, therefore important, that the audit committee be made aware of the risks faced by a company. It is management's responsibility to demonstrate to the audit committee the measures taken to address business risks. Further, it was added that the Compliance Officer of the company should certify the Risk Management report placed before the audit committee.

The Committee also noted that it was not practicable to put the responsibility of review of risk management only on the audit committee. It agreed that there must be a process by which key risks are reviewed by the entire Board of Directors and not just the audit committee. Further, there must be evidence demonstrating that this review process has actually taken place. Investors in a company would therefore know how the company has identified and addressed its business risks. It was also mentioned that verifiability and enforceability of this recommendation was difficult. This was because companies could obtain a sign-off from the Board members that such procedures were complied with.

Based on the above deliberations, the Committee makes the following mandatory recommendation

Mandatory Recommendation:
Procedures should be in place to inform Board members about the risk assessment and minimization procedures. These procedures should be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework.

Management should place a report before the entire Board of Directors every quarter documenting the business risks faced by the company, measures to address and minimize such risks, and any limitations to the risk taking capacity of the corporation. This document should be formally approved by the Board.

The Committee noted that there is a real necessity for Board members to understand the components of the business model and the accompanying risk parameters. However, the Committee also noted that Board members can always ask for information relating to the business model of the company. It also observed that the process of Board review of business risks will be a mandatory recommendation of the Committee. Therefore, training of Board members could be made recommendatory.

Non-mandatory Recommendation:
Companies should be encouraged to train their Board members in the business model of the company as well as the risk profile of the business parameters of the company, their responsibilities as directors, and the best ways to discharge them.

The Committee noted that that disclosure of unspecified uses of IPO proceeds would be a more transparent measure. A statement of funds utilised for purposes other than those stated in the offer document / prospectus should be prepared by management. This statement should be certified by the independent auditors of the company and approved by the audit committee. Based on the above discussion, the Committee makes the following mandatory recommendation

Mandatory Recommendation:
Companies raising money through an Initial Public Offering ("IPO") should disclose to the Audit Committee, the uses / applications of funds by major category (capital expenditure, sales and marketing, working capital, etc), on a quarterly basis. On an annual basis, the company shall prepare a statement of funds utilised for purposes other than those stated in the offer document/prospectus. This statement should be certified by the independent auditors of the company. The audit committee should make appropriate recommendations to the Board to take up steps in this matter.

The Committee noted that the Birla Committee Report had defined the broad roles and responsibilities of management. It was obligatory on the part of the Board of Directors of a company to define a code of conduct for itself and the senior management of the company, not just senior financial personnel. Concerns were expressed on two main areas, (a) enforceability, and (b) definition of senior management. The Committee also noted that sample codes were available at www.choan.edu. Based on the deliberations and views expressed by several members, the Committee makes the following mandatory recommendation

Mandatory Recommendation:
It should be obligatory for the Board of a company to lay down the code of conduct for all Board members and senior management of a company. This code of conduct shall be posted on the website of the company.

All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The annual report of the company shall contain a declaration to this effect signed off by the CEO and COO.

Explanation - For this purpose, the term "senior management" shall mean personnel of the company who are members of its management / operating council (i.e. core management team excluding Board of Directors). Normally, this would comprise all members of management one level below the executive directors.