Membership of the Audit Committee

Appointment and independence requirements

South Africa’s globally leading best practice report on corporate governance, King III, proposes that all companies should have an audit committee with at least three independent non-executive directors. The Companies Act legislates and requires that only certain categories of companies need to appoint an audit committee.

Appointment of the audit committee and independence requirements

Deciding whether to form an audit committee is complex in South Africa. SA’s globally leading best practice report on corporate governance, King III proposes that all companies should have an audit committee with at least three independent non-executive directors. The Companies Act legislates and requires that only certain categories of companies need to appoint an audit committee.

Appointment of the audit committee and independence requirements

The Companies Act states that, where the appointment of an audit committee is required, the audit committee must be appointed by the shareholders at every annual general meeting. This means that the appointment of the audit committee becomes an annual event. This requirement highlights the importance of the board’s nomination committee. As all audit committee members must be directors (members of the board), it is important that the nominations committee identifies suitably skilled and qualified individuals to nominate for appointment to the audit committee. Of course, the shareholders may appoint any director they deem fit and proper. Section 94 of the Companies Act determines that the audit committee must consist of at least three members who must be directors of the company and not: • be involved in the day to day management of the company for the past financial year; • be a full-time employee for the company for the past 3 financial years; • be a material supplier or customer of the company such that a reasonable and informed third party would conclude in the circumstances that the integrity, impartiality or objectivity of that director is compromised by that relationship; and • be related to anybody who falls within the above criteria. The requirements of section 94 are prescriptive. It would appear that should the company appoint an audit committee with persons other than those prescribed, it would not be an audit committee as required by the Companies Act. As a result, any functions undertaken by a non-compliant (that is an “improperly constituted”) audit committee will not have been performed by the audit committee as required by the Companies Act. This may impact the actions of the committee, and may even result in liability for the committee members. The audit committee can consist of as many members as the company wishes to appoint (but at least three), but each member must meet the criteria and must be a director of the company. The audit committee may utilise advisors and obtain assistance from other persons inside and outside of the company. The audit committee may also invite knowledgeable persons to attend its meetings. However, the formally appointed members of the audit committee entitled to vote and fulfil the functions of the audit committee will have to meet the criteria (non-executive independent directors) in accordance with the prescribed requirements. The JSE requires listed companies to appoint an audit committee in compliance with the King III. With regard to the composition of the audit committee, the committee must comprise at least three independent non-executive directors. If an issuer has an independent non-executive chairman of the board, he/she may be a member of the audit committee, subject to the following provisions: 1. all the other members of the audit committee (at least two) are independent non-executive directors 2. he/she may not be the chairman of the audit committee 3. the dual role (chairman of the board and member of the audit committee) is specifically disclosed to shareholders at the annual general meeting referred to in Section 94(2) of the Act, and 4. shareholders approve the appointment of the chairman to the audit committee at the annual general meeting.

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