Section 40 introduces a requirement for the establishment of audit committees by certain companies. Under subsection (2), the obligation to establish such a committee will apply to the board of directors of all public limited companies. As regards the directors of large private companies and relevant undertakings, as defined, the obligation under subsection (3) is to establish an audit committee that meets the requirements of the section or state in the annual directors report that they have failed to do so and explain the reasons for the failure. The section sets out the matters the audit committee should deal with in the company. The composition of the audit committee is stipulated and is essentially designed to ensure that it is an independent committee. This accords with international best practice.