Public limited liability companies would soon be required to conduct yearly evaluation of the individual members of their audit committee, according to new rules being proposed by the Securities and Exchange Commission (SEC).

The audit committee is a statutory body that is empowered by the Companies and Allied Matters Act (CAMA) to scrutinise the management and independent audit reports of a company. The audit committee comprises equal number of appointees by the board of directors and shareholders at their yearly general meeting.

A draft amendment to the rules on the audit committee mainly focuses on the institution of yearly evaluation and independence of audit committee members. According to the new rules, the yearly evaluation will be used as criteria for future eligibility for re-election as member of the audit committee.

Public companies would now compulsorily be required to put in place a mechanism for the annual performance evaluation of their audit committee and the individual members of such committees.

The performance evaluation system would include criteria and key performance indicators and targets for the audit committee as well as for the individual members of such committee. Besides, the performance evaluation of the audit committee and the individual members shall be independent.

“The performance evaluation of the Audit Committee and the Individual members shall be used as part of the criteria for determining eligibility for annual re-election,” according to the draft.

Also, every existing audit member would have to successfully scale through annual performance evaluation that includes key performance indicators and targets set by the company in order to be eligible for re-election.

Any public company that violates any provision of the rules and regulations on audit committee shall be liable to a penalty of not less than N100,000 and a further sum of not more than N5,000 for every day of default.

Besides, the new draft stipulates that a prospective member of the audit committee of a public company shall be independent.

The descriptive definition of independence, according to the rules, includes that the prospective member must not be a substantial shareholder of the company. His direct and indirect shareholding must not exceed 0.1 per cent of the company’s paid up capital. The prospective member must also not be a representative of a shareholder that has the ability to control or significantly influence management and such prospective member must not have been employed by the company or the group of which it currently forms part, or has served in any executive capacity in the company or group for the preceding three financial years.