Audit committees act as an important link in corporate governance mechanisms. As such, SOX Act, 2002, Blue Ribbon Committee’s report and Narayana Murthy Committee’s report have placed greater emphasis on their role in order to strengthen the functioning of these committees. The rationale behind this is that greater independence of audit committees is necessary for effective functioning and for alleviating weaknesses in corporate governance which, in turn, reduces the agency costs. Research evidence reaffirms this aspect. The objective of this paper is to examine the relationship between the independence of the audit committee, board independence and firm performance of listed firms segmented1 between BSE 100 and BSE 200 indices, for the years 2007 and 2008. The results are in consonance with other research studies indicating that performance of firms which have independent audit committees and greater board independence is higher resulting in premium valuations as measured by Tobin’s Q, a proxy for firm performance.

Audit committee is one of the main pillars of the corporate governance system. Constituting an audit committee is mandatory under Clause 49 and Section 292 A of the Companies Act, 1956. As per mandatory listing norms of SEBI, audit committee shall have minimum three members (all being non-executive directors), with the majority of them being independent and the chairman of the committee shall be an independent director. From January, 2006, onwards all listed firms have to comply with the Clause 49 of the listing agreements.

The audit committee plays an important role in monitoring the effectiveness of the internal control framework. It oversees and reviews the financial reporting process of a company and acts as an intermediary between external auditors, internal auditors, managers and the board of directors, to ensure proper information flow among them and also ensures transparency in reporting. Audit committee can support the board in implementing, monitoring and continuing good corporate governance practices benefitting the firm and its stakeholders. In the Indian context, the scope of the audit committee is widened to ensure compliance with International Financial Reporting Standard (IFRS) and risk oversight responsibilities. Research evidence of Brancato et al. (2009) indicates that two-thirds of companies currently delegate risk oversight responsibilities exclusively to the audit committees.

Accounting Research and Audit Practices, Economic Performance, Millennium Development Goals, Corporate Sustainability, Economic Transactions, Social Management, Environmental Accounting, Corporate Houses, Environmental Management System, Community Development, Waste Management, German Firms, United Nations Environment Program.