Secretarial Audit and its Scope

Secretarial Audit is the process of independent verification, examination of level of compliance of applicable Corporate Laws to a company. The audit process f properly devised ensures timely compliance and eliminates any unintended non-compliance of various applicable rules and regulations. An action plan of the Corporate Secretarial Department is to be designed so as to ensure that all event based and time based compliance are considered and acted upon. Secretarial Audit is to be on the principle of “Prevention is better than cure” rather than post mortem exercise and to find faults.

NEED FOR SECRETARIAL AUDIT

> Broadly, the need for Secretarial Audit is:

1. Effective mechanism to ensure that the legal and procedural requirements are duly complied with.

2. Provides a level of confidence to the directors, officers in default, Key Managerial Personnel etc.

3. Directors can concentrate on important business matters as Secretarial Audit ensures legal and procedural requirements.

4.  Strengthen the image and goodwill of a company in the minds of regulators and stakeholders.

5. Secretarial Audit is an effective compliance risk management tool.

6. It helps the investor in analysing the compliance level of companies thereby increase the reputation.

7. Secretarial Audit is an effective governance tool.

PREREQUISITES TO SECRETARIAL AUDIT

Section 204 of the Companies Act, 2013 provides for mandatory secretarial audit for every listed company and companies belonging to other prescribed class of companies. Such companies are required to annex a secretarial audit report with its Board’s Report.

As per Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the prescribed class of companies is as under:

1. every public company having paid-up share capital of fifty crore rupees or more;

2. every public company having turnover of two hundred fifty crore rupees or more;

3. every unlisted and private company who has outstanding loans of 100 crore or more to banks and financial institutions.

Company Secretary in Practice has been exclusively recognised for conducting secretarial audit. The format of Secretarial Audit Report shall be in Form No. MR-3. Section 134 and sub-section (3) of 204 provides that the Board of Directors, in its report, shall explain in full any secretarial audit report.

OBJECTIVE OF SECRETARIAL AUDIT

The objective of secretarial audit may be summarized as under:

1. To check and report on compliances of applicable laws and Secretarial Standards.

2. To point-out non-compliances and inadequate compliances.

3 To protect the interest of various stakeholders i.e. the Customers, Employees, society etc.

4. To avoid any unwarranted legal actions/penalties by law enforcing agencies and other. Persons as well.

PROCESS OF SECRETARIAL AUDIT

Institute of Company Secretaries of India (ICSI) has suggested the following process for Secretarial Audit, to be conducted by a Practicing Company Secretary:

1. APPOINTMENT SECRETARIAL AUDITOR

As per Rule 8 of the Companies (Meetings of Boards and its powers) Rules, 2014, read with section 179 of the Companies Act, 2013 secretarial auditor is required to be appointed by means of resolution at a duly convened board meeting.

2. COMMUNICATION TO EARLIER INCUMBENT

Whenever a company secretary in practice is engaged as a secretarial auditor in place of an earlier incumbent, he shall communicate to the earlier incumbent about the proposed engagement in writing to be sent by registered/speed post or any other mode of delivery, as may be recognised by the Institute of Company Secretaries of India.

3. ACCEPTANCE OF APPOINTMENT

A formal letter of appointment should be issued by the company to the secretarial auditor along with the copy of the board resolution for appointment. The secretarial auditor shall confirm acceptance of appointment in writing.

4. PRELIMINARY DISCUSSION/SURVEY

It is important to have relevant information about the company. The secretarial auditor is expected to take general overview of the operations of the company and interact with the personnel involved to know about the nature of the business. He may opt for surveys for generating information about the company.

5. PRELIMINARY MEETING

The preliminary meeting with the senior management and the administrative staff involved in the audit will give a fair idea of what is expected and the manner in which audit activities are to be undertaken. At this stage a time frame of the secretarial audit should be determined and finalised. The secretarial auditor shall discuss the scope and objectives of the audit, gather information on important board process, evaluate existing control systems and prepare the audit plan. He advise to get Management Representation letter for the purpose of secretarial audit.

6. FINALISATION OF AUDIT PLAN AND BRIEFING THE STAFF

It is important to work out an audit plan. The plan involves briefing the audit staff as to allotment of work, fieldwork responsibility and other roles. The audit plan should comprehensively outline the fieldwork and usage of audit tools.

7. TESTING, INTERVIEWS AND ANALYSIS

The Secretarial Auditor may use a variety of tools and technology to gather information about the company’s operations. The secretarial auditor should determine whether the controls identified during the preliminary review are operating properly and in the manner described by the Company. Fieldwork typically consists of   interviewing with staff of the company whether formally or informally, reviewing procedure manuals, processes, testing and analysing compliance with applicable policies and procedures and laws, rules, regulations and assessing the adequacy of controls. This exercise may result in significant findings which the secretarial auditor may bear in mind while preparing the secretarial audit report.

8. WORKING PAPERS

Working papers are vital tool of the audit process. They form the basis for expression of the audit opinion. They connect the management’s records and information to the auditor’s opinion. They are comprehensive and serve many functions.

9. AUDIT SUMMARY FOR DISCUSSION

It is recommended that the findings during the course of audit are summarised and prepared for initial discussions with the management for their views/clarifications/replies.

10. SUBMISSION OF SECRETARIAL AUDIT REPORT

After considering the clarification/replies of the management, the secretarial auditor shall prepare the secretarial audit report in Form MRS-3. The report is addressed to the members but is to be submitted to the board. The report shall contain the opinion on the statutory compliances examined by the auditor and shall state whether in his opinion the company is carrying out/not carrying out due compliances of the applicable provisions of the various laws. The report shall be provided with or without qualifications.