The concept of corporate governance is gaining wider popularity these days. Different stakeholders in a company like investors, shareholders, customers, etc. check the compliance management system of a company before making decisions. In such a scenario, Secretarial Audit has become a useful tool for companies to ensure compliance with regulatory requirements.
Further, it involves independent examination by a professional to check whether the company has complied with applicable rules and regulations or not. In this article, you will learn everything about secretarial audit including its objectives, scope, applicability, benefits, etc.
First, let us understand the meaning of secretarial audit.
What is a Secretarial Audit?
Secretarial Audit is an audit of the compliance management system of an organization. It is an examination by an independent professional to check whether the organization compiles with applicable laws, rules, and regulations or not. Additionally, it involves the verification of compliance processes followed by a company.
Therefore, the main objective of a secretarial audit is to ensure compliance with applicable legal rules and regulations. It is also known as ‘Compliance Audit’.
Objectives of Secretarial Audit
The following are the objectives of a Secretarial Audit.
- To verify and report on compliance with applicable laws, rules, and regulations.
- To point out cases of non-compliance or inadequate compliance.
- Avoidance of unwarranted legal actions and penalties by regulatory authorities.
- Protection of the interests of various stakeholders, including customers, employees, and society.
- To assess the effectiveness and efficiency of the company’s compliance management system.
- To facilitate corrective measures for any non-compliance and future risk mitigations.
Benefits of Secretarial Audit
The following are the benefits of a Secretarial Audit.
Proper and Timely Legal Compliance
Secretarial Audit ensures that a company complies with various laws and regulations, including the Companies Act, Taxation laws, Labor laws, Environmental laws, etc. This prevents the company from any legal disputes and penalties.
Assurance to Stakeholders
Secretarial Audit safeguards the interests of stakeholders, including customers, employees, and society, by confirming adherence to laws and regulations. It assures them that the business is operating ethically.
Mitigation of Compliance Risk
Secretarial Audit ensures that the company is compliant with all the applicable rules and regulations. Additionally, it points out the instances of non-compliance by the company. In totality, it helps the company take corrective measures to avoid future risks and penalties.
Therefore, a secretarial audit aids in the mitigation of compliance risk.
Secretarial audit enforces strict compliance and ethical business practices. It helps the business establish a good reputation and attracts investors and customers.
Assessment of Internal Control
The secretarial audit checks for weaknesses or vulnerabilities in the company’s internal control systems. This enhances the effectiveness and efficiency of the business’s operations.
Applicability of Secretarial Audit
The Companies Act, 2013, and the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 contain provisions regarding the Secretarial Audit of companies in India.
According to Section 204 of the Companies Act, 2013, Secretarial Audit is mandatory for the following companies –
- Listed Companies;
- Public Companies having paid-up share capital of Rs. 50 crores or more*
- Public Companies having turnover of Rs. 250 crores or more*
- Companies having outstanding loans or borrowings of Rs. 100 crores or more from banks or public financial institutions*
Therefore, the above-mentioned companies are mandatorily required to appoint a Practising Company Secretary to conduct the Secretarial Audit of a company. Further, a company shall give all the assistance and facilities to the professional for auditing the secretarial records of the company.
*Note – As of the last date of the latest audited financial statements of the company
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Appointment of Secretarial Auditor
The following is the procedure for the appointment of a secretarial auditor –
Step 1: Obtain written consent and certificate from the prospective secretarial auditor, confirming his eligibility for appointment as the secretarial auditor of the company.
Step 2: Issue a notice to convene a board meeting for the appointment of the secretarial auditor and determine his remuneration.
Step 3: Convene the board meeting and pass a resolution for the appointment of a secretarial auditor. Also, authorize the Company Secretary or a director to file the relevant form(s) with the Registrar of Companies (ROC).
Step 4: Draft the minutes of the meeting and circulate them to all directors for their comments within 15 days of the board meeting.
Step 5: File the board resolution with the Registrar of Companies (ROC) within 30 days of passing the same. It shall be filed in Form MGT-14 along with prescribed fees.
Step 6: Issue the official appointment letter to the secretarial auditor.
Scope of Secretarial Audit
Secretarial Audit has a wide scope as the applicability of laws differ from company to company and industry to industry. However, the Secretarial Auditor should check compliance with the following laws in general –
- Companies Act, 2013, and the governing rules;
- Securities Contracts (Regulation) Act, 1956, and the governing rules;
- Depositories Act, 1996, and the governing rules;
- Foreign Exchange Management Act, 1999, including rules relating to Foreign Direct Investment, Overseas Direct Investment, and External Commercial Borrowings;
- Regulations and Guidelines under the Securities and Exchange Board of India Act, 1992, mainly SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, SEBI (Prohibition of Insider Trading) Regulations, 2015, etc, if applicable;
- Compliance with Secretarial Standards issued by the Institute of Company Secretaries of India;
- Compliances with the Listing Agreement entered into with Stock Exchange(s), if applicable;
- Industry-specific laws and regulations relevant to the company’s sector, for instance, laws applicable to the insurance industry in the case of the insurance company, laws applicable to the banking industry in the case of the banking company, laws applicable to the pharma industry in the case of a pharma company, etc;
- Assessment of effectiveness and efficiency of systems and processes;
- Compliance with general laws such as labor laws, environmental regulations, and competition laws;
- Evaluation of specific observations or qualifications related to the Board’s structure and processes;
- Examination of the constitution of the Board of Directors with a proper composition of Executive Directors, Non-Executive Directors, Independent Directors, and Women Directors;
- Review of changes in the composition of the Board of Directors during the audit period, ensuring compliance with statutory provisions;
- Verification of notice provision and agenda details for Board Meetings sent at least seven days in advance, and procedures for obtaining further information and clarifications before meetings;
- Assessment of majority decisions and proper recording of dissenting members’ views in the minutes of the meeting.
- Reporting on specific events and actions during the reporting period that had a significant impact on the company’s affairs in accordance with the referenced laws, rules, and regulations.
Therefore, such a comprehensive audit ensures that the company is in compliance with a wide array of legal and governance requirements, thereby enhancing transparency and accountability.
Moreover, for compliance with taxation laws like Income Tax, GST, and Customs Duty, the secretarial auditor can rely on reports issued by the Statutory Auditor of the Company.
Secretarial Audit Report
A Practicing Company Secretary shall only prepare and sign the Secretarial Audit Report. It shall be furnished in Form MR-3 and annexed with the Board Report of the Company.
Further, if the Secretarial Auditor makes any qualification/ observation/ remark in his report, it shall be explained by the Board of Directors in their report.
Duty of Secretarial Auditor to Report Fraud
According to Section 143 of the Companies Act, 2013, if an auditor has a reason to believe that fraud has been committed by the officers or employees of the company, then it’s his/her duty to report such fraud to the appropriate authority.
The appropriate authority for reporting fraud depends on the amount of offense and hence can be classified into the following categories.:-
Fraud of Rs. 1 crore or above
A fraud that involves an amount of Rs. 1 crore or above shall be reported to the Central Government.
However, the auditor shall first report the matter to the Board of Directors or Audit Committee of the company within 2 days of his knowledge. The Board of Directors/ Audit Committee shall reply to the same within 45 days. Then, within 15 days, the auditor shall forward his report along with the reply received from the Board of Directors/ Audit Committee to the Central Government.
Moreover, if the Board of Directors or Audit Committee fails to reply within 45 days, then the auditor shall send a note to the Central Government stating that he forwarded the report to the Board/ Audit Committee but did not receive any reply from them.
Fraud involving amounts less than Rs. 1 crore
Those frauds that involve an amount less than Rs. 1 crore shall be reported by the auditor to the Board of Directors or Audit Committee of the Company within 2 days of his knowledge. Such report shall specify –
- Nature of the fraud;
- Approximate amount involved in the fraud; and
- Parties that are involved in such fraud.
Further, this information along with the remedial actions taken shall be disclosed in the Board Report of the Company.
Penalty for Non-Compliance
The Companies Act, 2013 provides for the following penalties in case of non-compliance relating to Secretarial Audit.
Penalty for Contravention
If a company or any of its officers or a Practising Company Secretary contravenes the provisions of Secretarial Audit specified in Section 204 of the Companies Act, 2013, then such company, officer, or Practising Company Secretary shall be liable to a penalty of Rs. 2 lakhs.
Penalty for Failure to Report Fraud
If a Secretarial Auditor fails to report fraud to the appropriate authority as mentioned above, then he shall be liable to a penalty of Rs. 5 lakhs in the case of a listed company/ Rs. 1 lakh in the case of other companies.