Secretarial Audit: Scope, Practice and Procedure

A Secretarial Audit is an audit to examine the compliances of various legislations including the Companies Act and other cooperative and economic laws applicable to the company. The Secretarial Audit is an audit where the Secretarial Auditor expresses an opinion as to whether there subsist appropriate systems and processes in the company proportionate with the size and operations of the company to monitor and check compliance with applicable laws, rules, regulations, and guidelines.

Overview of Secretarial Audit

Secretarial Audit are required for most companies in India. There are specific provisions which have to be complied by the company for carrying out audit. The main law that regulates secretarial audit in India is the Companies Act, 2013. Under section 204(1), companies are required to obtain a secretarial audit report from the secretarial auditor. Such provision has to be read with rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014.

Secretarial Audit is a process of checking various compliances applicable to the Company with the provisions of laws, rules, regulations, procedures, etc. by an independent professional who is a member of Institute of Company Secretaries of India holding a valid certificate of practice.

What Is the Purpose of Secretarial Audit?

The main aim of Secretarial Audit is to ensure that all the legal and procedural requirements are duly complied with and process has been followed duly. Any non-compliances and inadequate compliances can be easily detected through the process of Secretarial audit which leads to avoid various penalties and unwarranted actions against the Company and which also protects the interest of various stakeholders such as customers, employees, society, etc.

Companies that require to Undergo Secretarial Audit

Under the Companies Act 2013, the following is the list of companies that have to be audited by the independent practicing company secretary to procure the Company Audit Report.

• Every Listed Company;
• Every Public Company having paid up share capital of fifty crore rupees or more; or
• Every Public Company having a turnover of Two hundred fifty crore rupees or more; or
• Every Company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more

Such companies are also required to annex with its Board’s Report a Secretarial Audit Report given by Secretarial Auditor in Form No. MR-3.

Statutory Laws related to Secretarial Audit

There are certain laws specifically mentioned in Form no. MR-3 which needs to be examined by the Secretarial Auditor to report on the compliance of following specific laws:

• The Companies Act, 2013 and rules made thereunder
• The Securities Contracts (Regulation) Act, 1956 and rules made thereunder
• The Depositories Act, 1996 and the Regulations and bye-laws framed thereunder
• Foreign Exchange Management Act, 1999 and rules and regulations made thereunder to the extent of FDI, overseas direct investment and external commercial borrowings
• Regulations mentioned under Securities and exchange Board of India Act, 1992
• Regulations prescribed under ‘The Securities and Exchange Board of India (Listing Obligation Disclosure Requirements) 2015’
• Secretarial Standards issued by Institute of Company Secretaries of India
• Compliances with respect to Listing Agreement
• Compliance of ‘Other Laws’ which are applicable to specific companies or industries like for Banks all laws applicable to Banking Industries, for Insurance Company IRDAI and other laws applicable to it.
• General Laws like Labour laws, Environmental laws, Competition Laws, etc.
• Secretarial Auditor may rely on the reports given by Statutory Auditor on Income Tax, GST, Customs, etc.

Documents Required to Conduct Secretarial Audit

The Following documents are required to conduct Secretarial Audit are:

• Various registers and records: Register of Members and Debenture holders and their indexes, Foreign Register of Members, Register of Investments and Deposits, Register of Charges, Register of Contracts made between Related Parties, etc., Register of Directors and their shareholding, Register of Investment made, guarantee given or Security provided, Attendance Registers of Directors and Shareholders, Register of Transfer, etc.

• Returns: Annual Returns, Annual Accounts (Balance Sheet & Profit and Loss Accounts), Return of Allotment, Return of Appointment of MD/Manager/WTD, Return of Deposits, Registration of Resolutions and Agreements, Registration of Creation/Modification/ Satisfaction of Charges, etc.

• Notices, Agenda and detailed Agenda of the Board meetings, Committee Meetings and General Meetings
• Minutes of Board meetings, Committee Meetings and General Meetings
• Proof of dispatch of notice
• Charter Documents like AOA and MOA.
• Various E-forms filed with the ROC and other regulatory authorities
• If a Listed Company, Stock exchange compliances, Newspaper Advertisements, listing obligation disclosure requirements needs to be checked
• Bonds or Lease Deed if any;
• If there is a Foreign Investment, then Filings with RBI needs to be checked
• Consent of Directors and Auditors if appointment is made
• Remuneration and sitting fees of directors related documents
• Bank Account Statements related to declaration of Dividend
• CSR policy, Trust Deed and other documents related to the amount of expenditure and activities on which such amount has been spent.

Procedure for carrying out Secretarial Audit in India

The detailed Secretarial Audit process are as follows:

• Appointment of Company Secretary: Under Rule 8 of the Companies (Meetings of the Board) Rules 2014, the company is required to conduct a board meeting and pass the resolution related to appointment of a secretary auditor.

• Formal Communication to the Auditor: The appointment of the secretary auditor is supposed to be formally communicated to the individual carrying out the audit. This would be formally carried out by receiving a letter of engagement from the company.

• Signing the Letter of Engagement: Once the auditor is appointed, the letter of engagement has to be signed in order to ensure that duties and responsibilities are carried out in performance of audit functions.

• Preparing Working Papers Report: This step would include any reports related to secretarial audit which is carried by a company. Such summary related to secretarial audit would be carried out by the individual appointed as a secretarial auditor.

• Submission of Audit Report: In the last step, the report has to be submitted in accordance with the requirements of the Companies Act, 2013. When carrying out the submission of the report, a thorough analysis has to be carried out by a secretarial auditor. With this analysis some form of remarks related to the report must be provided. Such remarks have to be made in the report itself. As the audit is carried out by an independent party, the report must be unbiased. This report must be in the form of an opinion.

• Not Providing Opinion: If the work carried out by the auditor is hampered and not able to perform functions due to limitations imposed by the company, then such limitations must be highlighted in the report related to secretary audit. A remark has to be made that carrying out the compliance in restricted areas cannot be performed. If such opinion or remarks are present in the report, then the Board of Directors must provide an explanation of the same.

Wrapping Up

Compliance of various laws, rules and regulations have become an integral part of an organization for its smooth working. To ensure such compliance and to check on frauds, Secretarial Audit plays a vital role. Secretarial Audit not only provides an aid by complying with applicable laws but is also reduces the amount of penalties and prosecution by Government and other regulators. It also builds an image and goodwill of the Company and also generates confidence among the shareholders, creditors and other Stakeholders. Thus, Secretarial Audit founds to be an effective tool for a good corporate governance which intend to add value to the organization’s operations.