The audit is not always related to the inspection of accounts and financial records. In general, it means proper examination and verification of the company's process, records, efficiency, data, etc. Secretarial Audit is related to the inspection of compliance with applicable rules and regulations. Secretarial Audit ensures the regulators, stakeholders and even employees that management of the company is compliant and has a disciplined approach, risk management, internal control and governance process in place. Let us learn more about the Secretarial Audit in detail henceforth.
What is a Secretarial Audit in India?
Secretarial Audit is legal compliance to monitor and verify that the company adheres to the rules and obligations applicable upon it. Secretarial Audit plays a vital role to examine the error and mistakes periodically and to establish a robust compliance mechanism in the entity.
Every Company has several rules and regulations to comply under the Companies Act 2013. Therefore periodical Audit depicts exact information about applicable law on Company and the extent up to which it has complied with such provisions of law.
Scope of Secretarial Audit in India
Secretarial Auditor has to check the compliances under following provisions of law:
- Companies Act 2013
- Securities (Contract) Regulation Act
- Depositaries Act
- Securities and Exchange Board of India
- SEBI (LODR) Regulations
- Labor Law
- Environmental Law
- Provisions related to compliance of taxation such as Tax Audit, Income Tax Act, GST, etc.
Applicability of Secretarial Audit
Section 204(1) of Companies Act 2013 regulates scope, procedure, applicability, etc. related to Secretarial Audit. Therefore Audit is compulsory for the following class of companies:
- All Listed Company
- Unlisted Public Company having paid-up share capital exceeding INR 50 Crore
- Unlisted Public Company having a turnover exceeding INR 250 Crore
- Private Company that is a subsidiary of an unlisted public company with:
• paid-up above INR 50 Crore
• turnover above INR 250 Crore
What are The Benefits of Secretarial Audit
The secretarial audit is needed due to the following advantages:
- to ensure the effective mechanism in place to monitor compliance and non-compliance by a company
- secure the confidence of directors, employee, stakeholders, creditors, and management in the working of the company
- the audit ensures legal procedures are in place so that management can concentrate on important matters
- the compliant company enjoys the advantage of the goodwill
- Investors get a fair idea about the level of compliance the company does to be assured that their money is in safer hands.
Application of Secretarial Audit in different sectors
- For Listed Entities: Secretarial audit is made compulsory for listed entities by SEBI. These companies shall get themselves audited by PCA/PCS. During the audit, PCS shall reconcile the CDSL/NSDL details along with shares held
- For Central Public Sector: Ministry of heavy enterprise and public enterprise has made it mandatory for corporate governance of CPS undertakings.
- For Banks: RBI recommends due diligence for banks and they shall procure a certificate from practicing professionals stating the level of compliance do
- For Unlisted public/private company: Such a company gets audited once in a year. And are required to submit the report to ROC that is given by practicing professional
What is The Process of Secretarial Audit
There are no as such hard and fast steps to be followed for inspection, however following are the steps in general that can be followed by an auditor while conducting audit:
- Discuss with management regarding the scope of its work and professional fees to be rendered for the conduct of such audit
- Once the primary objects are set, identification of scope and activities to be carried shall be listed
- After the discussion and finalizing the PCS, the company shall issue an engagement letter consisting of terms and condition of his appointment
- PCS shall plan ahead of the procedure for audit such as areas of laws it will cover first, date of visits for conducting an audit, approx months or days required to be taken to complete audit, etc
- Conducting the audit and jotting down the entire observations and finding made throughout the audit
- Once the audit is completed, PCS shall submit the final Audit report in format MR-3 duly signed and stamped by Company Secretary in Practice
Section 204(1) states that Secretarial Audit can be conducted only by Secretarial Auditor who is a member of Institute of Company Secretary India (ICSI) holding a valid certificate of practice (COP), i.e., Practicing Company Secretary are allowed to be appointed as a Secretarial Auditor of the Company.
The company needs to pass Board Resolution in duly conducted Board Meeting for the approval of the appointment of Auditor and its terms of appointment. Resolution for such an appointment shall be filed with ROC through filing e-form MGT-14 within 30 days of appointment.
It is advisable, company to be compliant shall appoint the Secretarial Auditor when the financial year begins so that the appointed Auditor can verify the company throughout the year. Once the Audit is completed, Secretarial Auditor shall give its Audit report in the prescribed format of Form No MR-3 to be annexed with the board report.
Frequently Asked Questions
The company, its officer, director or practicing company secretary if contravenes any provision of this section shall be liable with a penalty of minimum INR 1 Lakh that can be extended to INR 5 Lakhs.
MR-3 also requires following reporting such as:
- constitution of the board is correct with proper balance of executive, non-executive and independent directors as required under companies act
- any changes made in the composition of directors was done keeping in mind the provision of law
- Minimum meetings required to be held were conducted by giving proper notice such as 7 days for a board meeting and clear 21 days for the general meeting.
- Meetings are recorded in minutes and such minutes are prepared and signed as per the law
- The report shall also reflect any material events that occurred during the year under review that have a major bearing on the affairs of the company.
- Reporting for financial or tax laws, Secretarial Auditor can rely on the data provided by the report of Statutory Auditor
Following are the objectives of Secretarial Audit:
- For the verification, that company has complied with the provisions applicable on it
- To examine and mark any non-compliance or error found in the prepared data, reports, accounts, minutes, etc.
- To safeguard the interest of stakeholders connected or concerned with the company in any way
- For avoiding any penal actions against the company.