Good Corporate Governance is a basic attribute of a healthy organization. Adherence of Corporate Governance principles increases the value of the organization and trust of stakeholders. However, lack of transparency and poor disclosure practices reduce effectiveness of corporate governance mechanism. In India, there are various statues, laws, rules and regulations that are applicable to the Corporate Sector. For reducing the risk of frauds as well as potential cost of non-compliance of applicable provisions, it became essential to conduct an effective audit. Due to this, The Institute of Company Secretaries of India, understood the need of Secretarial Audit and introduced the guidelines “Corporate Governance Voluntary Guidelines, 2009” which recommended the secretarial audit initially. Later, Companies Act, 2013 also introduced the concept of Secretarial Audit as a class of new audit in addition to other audits.
WHAT IS SECRETARIAL AUDIT?
Secretarial Audit is basically a process of verifying the documents and information of the company to check their compliance with provisions of all applicable laws, rules and regulations on the Company. It is a Compliance Audit. It is conducted by an independent professional. It helps in recognizing all non-compliances and taking timely remedial steps.
SECRETARIAL AUDIT AS PER COMPANIES ACT, 2013
Section 204 of Companies Act, 2013 read with Rule 9 of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 is applicable on Secretarial Audit.
It is mandatory for the following companies to conduct Secretarial Audit:
- Every Listed Company; or
- Every Public Company having paid-up share capital of Rs. 50 crores or more; or
- Every Public Company having turnover of Rs. 250 crores or more;
- Every company having outstanding loans and borrowings from banks or financial institutions of Rs. 100 crores or more.
Secretarial Audit Report:
- Prepared by Company Secretary in Practice.
- Prepared in Form No. MR-3 and annexed with the Board Report of the Company.
Assistance by Company: Company shall provide full assistance and facilities to the Auditor while conducting the secretarial audit of the company.
Explanation by Board: The Board of Directors shall explain in full in their report, any qualification or observation or other remarks made by Practicing Company Secretary in his Audit Report.
Contravention of the provision:
If a company or any officer of the company or the Practicing Company Secretary contravenes the provisions of this section, the company, every officer of the company or Practicing Company Secretary, who is in default, shall be punishable with fine which shall be minimum one lakh rupees but which may extend to five lakh rupees.
Note: Paid up share capital, turnover, or outstanding loans or borrowings as the case may be, existing on the last date of latest audited financial statement shall be taken into account.
APPOINTMENT OF SECRETARIAL AUDITOR:
- According to the provisions of Section 204, only a member of the Institute of Company Secretaries of India holding a certificate of Practice (i.e. PCS) is qualified to conduct secretarial audit of the company.
- Secretarial Auditor is required to be appointed by the Board of Directors of the Company in the Board Meeting.
- Remuneration may also be fixed by the Board of Directors in the Board meeting.
- Certified True Copy of the Resolution passed in the Board Meeting is required to be filed with Registrar of Companies in e-form MGT-14 within 30 days from the date of passing resolution.
- When a new secretarial auditor is appointed in place of the existing Secretarial Auditor, he/she should communicate the appointment to the earlier incumbent in writing by registered post.
Note: It is advisable for the company to appoint Secretarial Auditor at the beginning of financial year because Secretarial Audit involves checking of compliances on a continuous basis.
POWER AND DUTIES OF SECRETARIAL AUDITOR
- To provide guidance to the directors of the company related to their duties, responsibilities and powers.
- To obtain the books of accounts and other relevant vouchers of the company during the course of their audit.
- To receive information and explanation from the officers of company on various transactions.
- To assure compliance of various laws, rules and regulations applicable on the Company.
OBJECTIVES OF SECRETARIAL AUDIT
- To check and report on compliance
- To take correctives measures for non-compliance. To safeguard the interest of directors and investors of the company.
- To prevent unreasonable legal actions by law enforcing agencies.
BENEFITS OF SECRETARIAL AUDIT
- It helps in detecting non-compliance.
- It provides a level of confidence to the Directors & Key Managerial Personnel of the Company.
- It strengthens the goodwill of the Company.
- It reduces the work load of various regulators due to timely compliances.
SCOPE OF SECRETARIAL AUDIT
- Companies Act, 2013
- Securities and Exchange Board of India, 1992
- Reserve Bank of India, 1934
- Securities Contract (Regulations) Act, 1956
- Depositories Act, 2013
- Foreign Exchange Management Act, 1999
- Competition Act, 2013
- Listing Agreement
- Any other law applicable to the Client Company.
PROCESS OF SECRETARIAL AUDIT
- Auditor will gather all relevant documents and information of the Company which are required for audit.
- Auditor will conduct a formal meeting with the management of the Company and discuss the scope and objectives of examination.
- Management will issue the formal engagement letter to the auditor which will communicate the scope and objectives of audit.
- Auditor will meet with all senior management and other staff who may be involved in the audit process.
- Auditor will engage in planning for audit programme.
- Working Papers are prepared by the auditor to support the audit opinion.
- Auditor will prepare and submit the audit observations with the management.
- Auditor will discuss all the Audit Observations with the management of the Company.
- Auditor will receive response from the client for audit observations.
- Auditor will submit the Audit Report to the client company.
- Auditor may request the company to take all corrective actions.
With the recent amendment in the provisions of Secretarial Audit by the Ministry of Corporate Affairs, it’s scope has been increased. It was observed that due to this amendment it becomes mandatory for every company i.e. both unlisted public companies and private companies having outstanding loans or borrowings from Banks or PFI of Rs. 100 crores or more to conduct Secretarial Audit. However, the companies on which the provision of Secretarial Audit is not applicable should voluntary adopt the annual practice of Secretarial Audit to ensure compliance and to Prevent legal actions by the law-enforcing agencies. An audit is to be on the principle of “Prevention is better than cure” rather than postmortem exercise and to find faults. Secretarial Audit is a good corporate governance practice. Being a pro-active measure, Secretarial Audit gives a level of confidence to directors and provides assurance to investors of the company.