A. Explanation

This Provision states that the composition of an AC should be:

• At least three directors.
• All members should be Non-Executive Directors (NEDs).
• The majority should be Independent Directors (IDs).
• The AC Chairman should be an ID.
• At least two members, including the AC Chairman, should have recent and relevant accounting or related financial management expertise or experience.

This Provision is largely aligned with Sections 201B (2) and (3) of the Companies Act which also set specific composition requirements:

• At least three directors.
• The majority should not be EDs, related to an ED, or deemed to be non-independent by the Board.
• The AC Chairman shall not be an ED, or employee of the company or related corporation (which includes companies incorporated overseas and any foreign company).

The purpose of these rules is to ensure that the AC – which plays a critical role in ensuring the integrity of the financial statements through its oversight of the company’s financial reporting process, internal controls system and audit function – is sufficiently independent from management and the company, and remains objective.

The Board relies on the AC to ensure the integrity of the financial statements and provide assurance on the processes that contribute to them. It is important that its members are suitably qualified for this task, especially in today’s changing and complex business and accounting environments.

This Provision states that at least two members, including the AC Chairman, should have recent and relevant expertise and experience in accounting and/or finance. The Board should apply its business judgement in determining the appropriate accounting and finance qualifications.

That said, the responsibility of financial reporting rests with all directors. While it is important that the AC has members who are appropriately competent in accounting and finance, all directors should be financially literate.

As a reminder of this, ACRA issued a practice direction in 2014 to emphasise the duties of directors in relation to financial reporting. Furthermore, under its Financial Reporting Surveillance Programme, formal enquiry letters concerning possible non-compliances with prescribed accounting standards may be sent to the Board requesting an explanation, supporting documents and other records as necessary.

B. Practice Guidance

• Practice Guidance 10: Audit Committees

C. Related Rules and Regulations

• Section 201B(2) of the Companies Act: Audit Committees.
• Section 201B(3) of the Companies Act: Audit Committees.
• MR 704(8) and CR 704(7): Appointment or Cessation of Service.

D. CG Guides

• AC Guide 1.2: Structure and Authority [AC Composition].

E. Related Articles

• “Audit committees must now work even harder” by Gerard Tan. (66KB)
• “Eight habits of highly effective audit committees” by John F. Morrow and Joan Pastor. (2.3MB)