An external auditor checks your financial statements once a year. An audit committee is different — it's a standing governance layer inside the company that oversees financial reporting, internal controls, and the auditor's work throughout the year, not just at year-end. For a defined category of Nepali companies, forming an audit committee isn't optional; it's a legal requirement. This post explains who must have one, how it's structured, what it actually does, and how it differs from simply hiring an external auditor.
The Legal Trigger: NPR 30 Million Paid-Up Capital
Under Section 164 of the Companies Act, 2063, a company must form an audit committee if either of two conditions applies: its paid-up capital is NPR 30 million or more, or the company is fully or partly owned by the Government of Nepal. This means the requirement is triggered by capital structure, not by revenue, profitability, or listing status — a private company that has simply crossed the NPR 30 million paid-up capital mark is just as obligated as a large public company. Businesses approaching this threshold through a capital increase or new share issuance should plan for the audit committee requirement as part of that transition, not as an afterthought once the paperwork is filed.
Composition: Independence Is the Whole Point
The law is specific about who can and cannot sit on an audit committee, because the entire value of the committee depends on its independence from day-to-day management:
At least three members, forming the minimum size of the committee.
Chaired by a non-executive director — someone who is not involved in the company's daily operations.
At least one member with financial expertise — a person holding a professional accounting certification, or a bachelor's degree in accounting, commerce, management, finance, or economics along with relevant experience.
No close relatives of the chief executive are eligible to serve, to avoid conflicts of interest at the top of the organization.
Audit Committee vs. External Auditor
It's easy to assume that hiring an external auditor covers this obligation — it doesn't. The external auditor is an independent professional engaged annually to express an opinion on whether the financial statements are fairly presented. The audit committee, by contrast, is an internal board-level body that operates year-round: it reviews the external auditor's findings before they reach the full board, oversees the quality and integrity of financial reporting between audits, evaluates the strength of internal controls, and reports on its own activities and working policies as part of the board of directors' annual report. In short, the external auditor examines the numbers once a year; the audit committee is meant to make sure the numbers were being watched all year long.
Extra Requirements for Listed (NEPSE) Companies
Companies listed on the Nepal Stock Exchange face a further layer of obligations under the Securities Board of Nepal's (SEBON) corporate governance guidelines, on top of the baseline Companies Act requirement. Listed companies are generally expected to maintain a three-member independent audit committee that includes a representative of the public shareholders, alongside a separate risk management committee to assess and manage organizational and financial risk. SEBON's guidelines also push listed companies toward more frequent disclosure of the audit committee's activities and stricter separation between the roles of chairperson and chief executive. For a listed company, the audit committee is not just a compliance formality — it's actively monitored as part of SEBON's ongoing supervision of the capital market.
How Audit Committees Strengthen Investor Confidence
A properly functioning audit committee sends a clear signal to shareholders, lenders, and prospective investors that financial oversight doesn't rest solely with management. Because the committee is chaired by someone outside daily operations and includes a member with genuine financial expertise, it acts as a check against both honest error and deliberate misstatement before those issues ever reach the external auditor. Companies that treat the audit committee as a real working body — rather than a name on an organizational chart — tend to catch control weaknesses earlier, respond to auditor findings faster, and present a stronger governance profile when raising capital or seeking credit.
Setting One Up: Practical First Steps
If your company has crossed the NPR 30 million paid-up capital threshold, or is government-owned, here's a practical starting sequence:
1. Identify a qualifying non-executive director to chair the committee.
2. Confirm at least one member meets the financial-expertise requirement.
3. Formally constitute the committee through a board resolution.
4. Draft a working policy covering meeting frequency, reporting lines, and scope.
5. Include the committee's activities in the board's annual report, as required by law.
Conclusion
An audit committee is one of the clearest, most concrete governance obligations a growing Nepali company will face. The threshold is easy to check, the composition rules are specific, and the upside — stronger financial oversight, faster issue resolution, and greater investor confidence — extends well beyond simply satisfying Section 164. If your company is nearing the NPR 30 million paid-up capital mark, it's worth setting up the committee before it becomes a compliance gap.
If you're unsure whether your company currently meets the threshold, or how to structure your audit committee correctly, it's best to work through it with your Chartered Accountant.
Disclaimer: This article is for general information only and does not constitute legal or tax advice. Tax rules and their application can vary based on individual circumstances. Please consult an ICAN-registered Chartered Accountant before making any decisions related to audit committee formation or corporate governance compliance.
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