Section 94 of the Companies Act 71 of 2008 (“Companies Act”) requires that public companies and state owned companies appoint an audit committee. In addition, any other types of companies (either private company, personal liability company or non-profit company) that provide for the appointment of an audit committee in their Memorandum of Incorporation, must comply with the relevant provisions of the Companies Act to the extent provided for in the Memorandum of Incorporation.
The Companies Act further 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. As all audit committee members must be directors and 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. The shareholders are however entitled to 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 who are not:
- involved in the day to day management of the company for the past financial year;
- a full-time employee for the company for the past 3 financial years;
- 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
- related to anybody who falls within the above criteria.
The requirements of section 94 of the Companies Act are furthermore prescriptive, this means 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. This may impact the actions of the committee, and may even result in liability for the committee members.
In conclusion the audit committee can consist of as many members as the company wishes to appoint, with a minimum of three, but each member must meet the criteria and must be a director of the company. The audit committee may furthermore also invite knowledgeable persons to attend its meetings in order to assist the audit committee with its functions.