The Institute of Company Secretaries of India
Exposure Draft
Guidance Note on Auditing Standard
on Secretarial Audit
(CSAS-4)
(Last date for submission of comments :
7th November, 2020)
The Institute of Company Secretaries of India (ICSI), recognising the need to provide support to its members in developing auditing acumen, techniques and tools and for inculcation of best auditing practices among its members had issued ICSI Auditing Standards on 6th May, 2019.
To set out the explanations, procedures and practical aspects in respect of the various provisions contained in the Auditing Standard on Secretarial Audit (CSAS-4), the Auditing Standards Board (ASB) of the Institute has brought out the Exposure Draft of the Guidance Note on Auditing Standard on Secretarial Audit (CSAS-4).
Words and expressions used in the Guidance Note imparting the singular include the plural and words and expressions imparting any gender include every gender.
In this Exposure Draft of Guidance Note on Auditing Standard on Secretarial Audit (CSAS-4), the text of the exposure draft of Guidance Note on ICSI Auditing Standard CSAS-4 is given in Italics, while the text of the Standard is given in normal font.
The exposure draft of the above-mentioned Guidance Note is hereby placed for the public comments.
The comments should be given in the following format:
| Para No. of Auditing Standard on Secretarial Audit (CSAS-4)
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Text of the Guidance Note
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Suggested Text of the Guidance Note
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Rationale for Suggestion
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EXPOSURE DRAFT OF GUIDANCE
NOTE ON AUDITING STANDARD ON
SECRETARIAL AUDIT (CSAS-4)
The Auditing Standard on Secretarial Audit (CSAS-4) formulated by Auditing Standard Board (ASB) of the Institute of Company Secretaries of India (ICSI) and issued by the Council of ICSI, is effective from 1st July, 2019 on a recommendatory basis and mandatory with effect from 1st April, 2021.
This guidance Note sets out the explanations, procedures and practical aspects in respect of the provisions contained in CSAS-4 to facilitate compliance thereof by the stakeholders.
Scope
This Auditing Standard (‘the Standard’) is applicable to the Auditor undertaking Secretarial Audit under Section 204 of the Companies Act, 2013 and rules made thereunder.
The Standard shall apply to Secretarial Audit undertaken under Section 204 of the Companies Act, 2013 and Regulation 24A of The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
However, the application of this Standard is not mandatory for:
A. Annual Secretarial Compliance Report issued in terms of SEBI Circular No. CIR/CFD/CMD1/27/2019 dated 8th February, 2019; and
B. Secretarial Audit entrusted on a voluntary basis by an Auditee to an Auditor. However, adherence to the Standard is recommended in respect of Audits entrusted on voluntary basis also.
Note: This Standard is not applicable in case the Secretarial Audit is mandated by any third party or regulatory authority. However, if the Auditor has followed the Auditing Standards issued by the ICSI while performing the Audit, he should declare the fact that he has followed the Auditing Standards (CSAS 1 to CSAS 4) issued by the Institute of Company Secretaries of India.
The Standard deals with basis and manner for carrying out the Secretarial Audit
The Guidance Note on CSAS-4 deals with basis and manner for carrying out the Secretarial Audit and provides standards for evaluation of statutory compliances and corporate conduct in relation thereto.
Effective Date
The Standard is effective and recommendatory for Secretarial Audit accepted by the Auditor on or after 1st July, 2019 and mandatory for Secretarial Audit accepted by the Auditor on or after 1st April, 2020.
In view of the developments arising due to the spread of Covid-19 pandemic, the effective date of mandatory applicability of ICSI Auditing Standards CSAS-1 to CSAS-4 has been extended for Audit Engagements accepted by an Auditor on or after 1st April, 2021. Members are advised to follow the Institute’s communications/guidelines, which may be issued from time to time, for the date of mandatory applicability of ICSI Auditing Standards CSAS-1 to CSAS-4.
Objective
The objective of the Standard is to lay down the principles for evaluation of statutory compliances and corporate conduct in relation thereto.
Adherence to other Auditing Standards
The Auditor shall adhere to the Auditing Standards on – (a) Audit Engagement (CSAS-1), (b) Audit Process and Documentation (CSAS-2) and (c) Forming of Opinion (CSAS-3).
How adherence to other standards has to be ensured while complying with CSAS-4?
An Auditor while accepting Secretarial Audit, shall also comply with the principles laid down in CSAS-1 to CSAS 3.
For e.g., M/s. ABC & Associates, a practicing company secretaries firm, accepts an audit assignment on 20thNovember, 2020 for the FY 2020-2021. The firm should adhere to the principles laid down in the CSAS-1 (Audit Engagement) while accepting the audit assignment, the Auditor should plan, proceed and perform the audit assignment as per the CSAS- 2 (Audit Process and Documentation) and give his opinion based on the Audit Process performed by him in line with the principles given in CSAS-3 (Forming of Opinion).
Definitions
For the purpose of Auditing Standards (CSAS) issued by The Institute of Company Secretaries of India (‘ICSI’), the following terms shall have the meaning attributed as below, unless specified otherwise:
1. “Management” as defined in CSAS-1
“Management” includes Board of Directors and persons who have been entrusted with the responsibility of governance and compliances of the Auditee.
The term “persons who have been entrusted with the responsibility of governance and compliances of the
Auditee” includes the Key Managerial Personnel as defined under Section 2(51) of the Companies Act, 2013, Senior Management as defined under SEBI (LODR) Regulations, 2015 and the explanation given in Section 178 of the Companies Act, 2013.
As per Section 2(51) of Companies Act, 2013: “Key Managerial Personnel”, in relation to a company, means:
(i) the Chief Executive Officer or the Managing Director or the Manager;
(ii) the Company Secretary;
(iii) the whole-time Director;
(iv) the Chief Financial Officer;
(v) such other officer, not more than one level below the directors, who is in whole-time employment, designated as Key Managerial Personnel by the Board; and
(vi) Such other officer as may be prescribed.
Explanation to Section 178 of the Companies Act, 2013, describes that “Senior Management” means personnel of the company who are members of its core management team, excluding Board of Directors, comprising all members of management one level below the Executive Directors, including the functional heads.
As per Regulation 16(1)(d) of SEBI (LODR) Regulations, 2015: “Senior Management” shall mean officers/ personnel of the listed entity who are members of its core management team excluding board of directors and normally this shall comprise all members of management one level below the Chief Executive Officer/ Managing Director/ whole time Director/ Manager (including Chief Executive Officer/ Manager, in case they are not part of the board) and shall specifically include Company Secretary and Chief Financial Officer.
2. “Records” as defined in CSAS-3
“Records” include:
(i) Memorandum and Articles of Association, bye-laws or any other constitutional documents;
(ii) Minutes, returns, forms, index and Registers;
(iii) Books and papers include books of accounts, deeds, and vouchers;
(iv) Agreements, Memorandum of Understanding;
(v) Other documents maintained by the Auditee either in physical or electronic form; and
(vi) Correspondence
The records will also include prior Period Records. If an opinion forming warrants the review of prior Period Records, the same may also be considered as Records.
Records of regulators, authorities and third parties may also be considered as Records if an opinion forming warrants taking cognizance of such records as clarified in the Guidance Note to CSAS-3.
1. Identification and segregation of applicable laws
The Auditor shall take note of the industry specific laws and other laws as may be applicable to the Auditee based on the identification/ segregation by the Management and his own verification.
What are Industry specific laws?
Identification of all laws applicable to the Auditee, as well as industry specific laws and the segregation thereof, is the primary responsibility of the Auditee. Auditor’s role is to verify that the laws identified and segregated by the Management are appropriate and sufficient having regard to the business of the Auditee. The Auditor shall exercise his professional judgment to verify that the identification and segregation of the laws made by the Management, as may be applicable specifically to the Auditee, is correct. In case, the Auditor is not satisfied by the identification and segregation made by the Management, or no such identification and segregation has been made, he should seek explanation from the Management to form the opinion and accordingly report.
The Institute of Company Secretaries of India vide communication dated 22nd December, 2014 and 15th May, 2015 has clarified regarding the scope of Secretarial Audit with regard to industry specific and other laws as under:
(1) Reporting on the compliance of ‘other laws as may be applicable specifically to the company’ include all the laws which are applicable to specific industry, For example, for Banks – all laws applicable to Banking Industry; for insurance companies – all laws applicable to insurance industry; likewise, for a company in petroleum sector – all laws applicable to petroleum industry; similarly, for companies in pharmaceutical sector, cement industry, etc. – all laws specifically applicable to them;
(2) Examining and reporting whether the adequate systems and processes are in place to monitor and ensure compliance with general laws like labour laws, competition laws, and environmental laws.
(3) The provisions relating to audit of accounts and financial statement of a company are dealt in the Statutory Audit, and that relating to taxation is dealt in Tax Audit. Hence, the Secretarial Auditor may rely on the reports given by statutory auditors or other designated professionals.
What are other Applicable Laws?
“Other laws as may be applicable specifically to the company” shall mean all the laws, rules and regulations that are applicable specifically to the Company. The Secretarial Auditor may take note of all such laws, rules and regulations identified by the management of the company;
For example for Banks – all laws applicable to Banking Industry; for insurance company – all laws applicable to insurance industry; likewise, for a company in petroleum sector – all laws applicable to petroleum industry; similarly, for companies in pharmaceutical sector, cement industry, etc.
Principles for making such segregation
Segregation of laws applicable on the Company into the industry specific and general is essential for Secretarial Audit. Based on the following factors auditor should verify the correctness of the segregation of the laws:
- Registration with various authorities such as SEZ, Sectoral Regulators, etc.
- Segments such as Manufacturing/ Trading/ Service/ E-commerce and Industry classification thereof
- Status of company such as listed/ unlisted
- Geographic location of registered office, units/ divisions/ plants/ branches, etc.
However, for identification of laws applicable on the
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company, in addition to above following factors shall also be considered:
- Key financial parameters such as Turnover, Paid-up Share Capital, Net Worth, Borrowings, etc.
- Type/ Class of company such as Private, Public, Holding, Subsidiary, Foreign, Nidhi, Producer, Section 8, etc.
- Agreements governing rights, obligations of shareholders such as Joint venture, shareholders
- Number, class and category of employees/ workers such as women, contractual employees, etc.
It is important to note that certain laws which may fall in the category of General Laws may also become specific laws for particular industries.
Illustrations for various Industries Specific Laws
Illustration 1: For a food & beverages manufacturing & processing unit, industry specific laws includes National Food Security Act, 2013, Food Safety and Standard Act, 2006 and State specific laws, if any .
Illustration 2 : For a Coal Mining company, industry specific laws includes Coal Mines Act, 1952, Indian Explosives Act, 1884, Colliery Control Order, 2000 and rules & regulations made thereunder, Coal Mines Pension Scheme, 1998, Coal Mines Conservation & Development Act, 1974,The Mines Vocational Training Rules, 1966, The Mines Creche Rules, 1961, The Mines Rescue Rules, 1985 etc.
Illustration3: For a Print Media company, industry specific laws includes The Broadcasting Act 1996, The Press and Registration of Books Act, 1867 & rules made thereunder, Press Council Act, 1978, The Registration of Newspaper Rules 1956, The Indian Telegraph Act 1885, Working Journalists and other Newspaper Employees (Conditions of Service) and Miscellaneous Provisions Act, 1955, Delivery of Books and Newspapers (Public Libraries) Act 1954, Wage Board Act along with rules and regulations w.r.t Newsprint and Electronic Media, etc.
2. Verification of corporate conduct and compliance of laws
2.1 Identification of Events/ Corporate Actions
The Auditor shall identify events/ corporate actions that took place during the audit period. The identification shall be made by reviewing the website of the regulators, website of the Auditee, statutory records including books and papers, interaction with the Management and in any other appropriate manner.
What are events/ corporate action?
A corporate action is an event initiated by a company that brings or could bring an actual change to the working of the company, such as the investment made during the period under audit, change in the borrowing limits, issuance of the securities–equity or debt, appointment of the KMPs, etc., as approved by its board of directors and/or shareholders.
An action based event may be defined as any activity that amends the functioning of an organization and impacts its stakeholders, including Shareholders, both common and preferred, as well as Lenders. These events are generally approved by the company’s board of directors or shareholders of the company, some of the examples are given below for reference:
- Events/ actions altering the Charter documents of the company
- Changes in the Capital structure of the company
- Change in the Affairs/ Management of the company
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Change in the Licensing or permission for the business operation of the company
Casual Vacancy of statutory auditor/ director/ KMP
Borrowing in excess of limits specified in Section 180 of the Companies Act, 2013
How to identify events/ corporate actions?
The Auditor is expected to identify the Corporate Actions from which a compliance requirement may arise. Corporate actions may primarily be identified from the financial statements, board agenda, minutes of the Auditee and reporting and filing to the regulators, etc.
Various sources for identification of events/corporate actions
For identification of such events and corporate actions, the Auditor should use various tools such as Auditee’s financial statements, annual report, Board Agenda, minutes and statutory disclosures on website of the company and on any other platform such as stock exchange, third party sources which may include registrar and transfer agents, banks, financial auditor, stakeholders etc.
2.2 Verification of Compliance
The Auditor shall verify all event and calendar based compliances from the Records of the Auditee, database or website of the regulators and other relevant sources.
How to verify the compliances?
The Auditor shall use systematic and comprehensive audit checklists for carrying out the audit and verifying the compliance requirements. The Auditor shall compile and validate the checklists for use in the audit process on the basis of information gathered about the Auditee and scope of the audit. It is a useful tool to ensure that no compliance point is missed or omitted while conducting the audit. The audit checklist should provide structure and continuity to an audit. Audit checklists should be reviewed and updated from time to time to meet the scope of audit and its effectiveness.
The Auditor should verify the compliances of applicable laws and rules based on the information gathered by the Auditor.
3. Board Composition
The Auditor shall verify compliance of the Companies Act, 2013, SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, Agreement with Lenders/ Investors, Articles of Association and provisions of other Acts/ Rules/ Regulations, Guidelines and Policies, board decisions, shareholders decisions, as may be applicable to the Auditee with regard to:
Various provisions mandating Board Composition
There are certain companies which are governed by Special Acts in addition to the Companies Act, 2013 with certain exemptions, for e.g., Banking Companies, Insurance Companies, State Financial Corporations, Public Sector Units, in such cases the Auditor shall ensure the Board Composition is as per the requirements of the applicable laws and acts to the Auditee. A few examples of special situations are given below for reference:
Example 1: In case the Auditee is a non-aviation entity that owns an aircraft, then it will require prior approval of the Ministry of Aviation for composition or re-composition of its Board of Directors.
Example 2: The board composition in the State Bank of India (SBI) is regulated by the State Bank of India Act, 1955.
Role of Auditor in verification of Board Composition
The Auditor should identify the laws and rules that govern the company and check the compliances of the Board Composition in accordance with those applicable laws and rules. For e.g., Banking Company is regulated by the Banking Regulation Act, 1949, therefore, the Auditor should ensure that the Board Composition is in compliance of Banking Regulation Act, 1949 or any other law specifically applicable to the Auditee in addition to the basic governing laws enumerated under the Companies Act, 2013 or SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
In case of audit of any nationalized bank, the Auditor should check the Board Composition in line with The New Bank of India (Amalgamation and Transfer of Undertakings) Scheme, 1993.
3.1 Overall composition of the Board including the minimum and maximum strength of the Board.
The Auditor should examine the applicability of the various laws and regulations applicable to the Auditee to verify the requirement of minimum and maximum number of directors on the Board of the Auditee. In case of specific categories of companies to which special Acts apply such as Insurance Act, Banking Regulation Act and Electricity Act, different rules are prescribed w.r.t minimum and maximum number of the Board of Directors and accordingly the auditor should consider the compliances envisaged under those laws, Articles of Association and arrangements as may be appropriate in the context.
3.2 Optimum Combination of the Board including proportion of executive, non-executive, independent, non-independent, retiring, non-retiring, woman and nominee director.
Various provisions mandating optimum combination The optimum combination of the Board should be as per the provisions laid down in various Statutes such as the Companies Act, 2013, SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015, the Banking Regulation Act, 1949, the Insurance Act, 1938, etc., as may be applicable to the company.
For example, provisions of the Companies Act, 2013 w.r.t the Board Composition is given as under:
- As per section 149 (2), every company shall have at least one director who stays in India for a total period of not less than one hundred and eighty-two days during the financial year.
Provided that in case of a newly incorporated company the requirement under this sub-section shall apply proportionately at the end of the financial year in which it is incorporated.
- As per section 149(3), every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.
Explanation – for the purposes of this sub-section, any fraction contained in such one-third numbers shall be rounded off as one.
An independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director.
As per second Proviso to Section 149(1) read with Rule 3 of The Companies (Appointment and Qualification of Directors) Rules, 2014 of the Companies Act, 2013, the following classes of companies are required to appoint at least one Woman Director:
(i) every listed company;
(ii) every other public company having –
(a) paid–up share capital of 100 crore Rupees or more; or
(b) turnover of 300 crore Rupees or more.
For appointment of Women Director, paid up share capital or turnover, as the case may be, as on the last date of latest audited financial statements has to be taken into account.
Similarly, as per Regulation 17 of SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 provides Board Composition as under:
1) The composition of Board of Directors of the listed entity shall be as follows:
(a) Board of Directors shall have an optimum combination of executive and non-executive directors with at least one woman director and not less than fifty percent of the Board of Directors shall comprise of non-executive directors;
Provided that the Board of Directors of the top 500 listed entities shall have at least one independent woman director by April 1, 2019 and the Board of Directors of the top 1000 listed entities shall have at least one independent woman director by April 1, 2020;
Explanation: The top 500 and 1000 entities shall be determined on the basis of market capitalization, as at the end of the immediate previous financial year.
(b) Where the Chairperson of the Board of Directors is a non-executive director, at least one-third of the Board of Directors shall comprise independent directors and where the listed entity does not have a regular non-executive Chairperson, at least half of the Board of Directors shall comprise independent directors:
Provided that where the regular non-executive chairperson is a promoter of the listed entity or is related to any promoter or person occupying management positions at the level of Board of Directors or at one level below the Board of Directors, at least half of the Board of Directors of the listed entity shall consist of independent directors.
(c) The Board of Directors of the top 1000 listed entities (with effect from April 1, 2019) and the top 2000 listed entities (with effect from April 1, 2020) shall comprise of not less than six directors.
Explanation: The top 1000 and 2000 entities shall be determined on the basis of market capitalization as at the end of the immediate previous financial year.
(d) Where the listed company has outstanding SR equity shares, at least half of the Board of Directors shall comprise of independent directors.
Role of Auditor in verification of optimum combination
Laws specifically applicable to the company may also mandate to have optimum combination of directors. The Auditor should also verify the compliance thereof and report deviations, if any.
3.3 Eligibility criteria including disqualifications of directors. Various provisions mandating qualifications/ disqualification The conditions for qualifications/ disqualification of a director prescribed in the Companies Act, 2013 or any other industry specific Act or law, need to be checked while verifying the Board Composition of the company. For example, Section 164 of the Companies Act, 2013 lays down the provisions for disqualifications for the appointment as Director on the board of the company. Further, the Auditor also needs to check the eligibility criteria including disqualifications of the directors as may be prescribed in any other industry specific Act or laws applicable to the company.
3.4 The constitution and composition of Committees of the Board.
Various provisions mandating Board Committees
The constitution of various Committees and the terms of reference of the Committees can be as per various regulatory requirements.
For example, for banking companies, stipulated Committees shall mean committees constituted in compliance with Banking Companies Act, Circulars issued by RBI and GOI from time to time; Listing Agreement.
Other than Banking companies or other specific companies to which special Acts apply, there are certain mandatory committees which are required to be constituted by certain class or classes of companies as per the Companies Act, 2013, SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015 and certain industry/ sector specific laws. Such mandatory committees include:
- Audit Committee
- Nomination and Remuneration Committee
- Stakeholders Relationship Committee
- CSR Committee
- Risk Management Committee
- Internal Committee constituted under PoSH Act.
Role of Auditor in verification of Board Committees
The Auditor needs to check whether the constitution of committees, as constituted by the auditee, is as per the laws, act, rules, regulations and standards applicable to the Auditee.
4. Board Processes
The Auditor shall verify that the decisions of the Board and its Committees are taken and recorded in compliance with applicable laws, rules, regulations, guidelines, standards and defined internal processes, if any.
Various provisions mandating Board Processes
Provisions w.r.t Board processes may include:
- Meetings of Board and its Committees
- Board’s performance evaluation and training
- Appointment and Resignation of the members of the Board.
Role of Auditor in verification of Board Processes
The Auditor shall verify notice of the meetings, minutes and supporting records, including agenda, to satisfy himself whether the company has complied with the applicable laws, rules, regulations, guidelines, standards and defined internal processes (defined internal processes to be explained). Many corporates have manuals for Board Processes, in such cases, the Auditor should verify whether the company has complied with the policy and processes laid down in the manual of the Auditee.
If there are deviations from the policies and processes laid down in the Manual given by the Company, then the Auditor shall report the same as a deviation from system and processes.
5. System and Process
System and process broadly refers to the framework of legal and procedural compliances of the Auditee including but not limited to internal regulations, control, guidance and governance.
The Auditor shall assess the efficacy and adequacy of the system and processes of the Auditee commensurate with its size and operation for verifying compliance of applicable laws, rules, regulations, standards, guidelines and defined internal processes, if any by:
5.1 Reviewing records maintained by the Auditee.
5.2 Understanding compliance responsibility centres, control points, matrix, flow of information, escalation of non-compliances to different levels, reporting of any noncompliance.
5.3 Assessing compliance mechanism and understanding its extent, coverage and severity mapping. The Auditor shall also assess compliance manual/ standard operating procedures, if any, available with the Auditee.
5.4 Analysing instances of show cause notices received, prosecution initiated, fine or penalties levied, imprisonment ordered, qualification, adverse remark or observations in the statutory, internal or industry specific audit, orders passed by regulatory bodies or judicial/ quasi-judicial authorities.
What is the meaning of systems and processes?
A system is the overall “thing”, or a core element, you’re looking to have and/or implement in your business. It’s something that helps your business run. The processes are all the things you do in order to make any given system work most efficiently. In other words, systems are designed to connect all of an organization’s intricate parts and interrelated steps to work together for the achievement of the business strategy. System and process in the context of Secretarial Audit includes internal policies, decisions or procedures, etc. laid down by the Auditee for ensuring the compliance of the various laws, rules, standards and guidelines as may be applicable to the company. The Auditor should verify those policies, decisions, procedures, etc. of the Auditee to verify the adherence thereof and ascertain that the systems and processes are adequate and commensurate to its size and operations to ensure compliance with applicable laws, rules, regulations, standards, guidelines and defined internal processes .
6. Detection of Fraud
6.1 The Auditor shall exercise professional judgment and maintain professional scepticism throughout the planning and performance of the audit to detect and report the fraud envisaged under the provisions of Section 143(12) of the Companies Act, 2013 read with Companies (Audit and Auditors) Rules, 2014.
Here, professional scepticism means, an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.
Professional scepticism includes being alert to, for example:
- Audit evidence that contradicts other audit evidence obtained.
- Information that brings into question the reliability of documents and inquiries to be used as audit evidence.
- Conditions that may indicate possible fraud.
Professional Judgement means, the application of the accumulated knowledge and experience gained through a relevant accounting or auditing training, by making use of the ethical standards, resulting in making informed decisions about the courses of action that are appropriate in specific circumstances.
6.2 During the course of the audit, if the Auditor suspects commission of any fraud, he shall endeavour to collect further evidence for the same. The suspicion may arise on perusal of internal control systems, complaint under whistle blower mechanism and reports of the other auditors, etc.
6.3 The Auditor shall ensure to collect sufficient evidence which substantiates his suspicion of the commission of the fraud against the Auditee by its employees and officers.
Here ‘Suspicion’ is a state of mind more definite than speculation, but falls short of knowledge based on evidence. It must be based on some evidence, even if that evidence is tentative – simple speculation that a person may be engaged in fraud is not sufficient grounds to form a suspicion. Suspicion is a slight opinion but without sufficient evidence.
- Examples of information which could be classified as suspicion are provided below: Recurring negative cash flows from operations or an inability to generate cash flows from operations while reporting earnings and earnings growth.
- There is excessive pressure on management or operating personnel to meet financial targets established by those charged with governance, including sales or profitability incentive goals.
- The practice by management in maintaining or increasing the entity’s stock price or earnings trend.
- Significant, unusual, or highly complex transactions, especially those close to period end that pose difficult “substance over form” questions.
- Significant related party transactions which appear to be not in the ordinary course of business or with related entities not audited or over which the Auditor does not have information.
If suspicion of fraudulent activity arises during the audit, the Auditor notifies the appropriate levels of management and those charged with governance, where appropriate, unless they may be implicated.
If Auditor has received report of other Auditor and it indicates a fraud, then that will be considered by the Auditor as a basis of his suspicion of the fraud.
Pursuant to the reply of the company disagreeing with the initial belief of the Auditor that a suspected offence involving fraud is being or has been committed, if the auditor is convinced that his initial suspicion was incorrect, the need for reporting the matter to the Central Government would not be applicable. This situation would arise only if the Auditor did not have the evidence or information that is now provided as part of the reply or additional information has now been provided to the Auditor and there is persuasive evidence now available to convince the Auditor that the suspected offence involving fraud does not exist.
7. Reporting of Fraud
7.1 If the Auditor has sufficient reason to believe that there is commission of fraud and have justifiable grounds for the same, he shall report to Audit Committee/ Board/ Central Government as per the process laid down under the Companies Act, 2013 and include the same in Secretarial Audit Report.
7.2 The Auditor shall verify whether the Audit Committee/Board has given any comments on the fraud reported by the auditors in their report in terms of the provisions of the Companies Act, 2013.
7.3 The Auditor shall verify if the fraud detected by other Auditor has been reported to the Audit Committee/ Central Government and report the same in the Secretarial Audit Report.
Reporting of fraud – Auditor will take note of and mention the fact about reporting of fraud by the other Auditor e.g., statutory Auditor under CARO, or by Cost Auditor or Internal Auditor. While the reporting responsibility under Section 143(12) is to the Audit Committee or the Board of Directors of the Company and/ or to the Central Government, the Auditor would also need to consider whether such matter also needs to be disclosed in the Auditor’s Report under Section 143(3) (f) which requires the auditor to state his/her observations on financial transactions/ matters, which have any adverse effect on the functioning of the company to the extent it relates to the non-compliance of applicable laws, act, rules, regulations and guidelines covered under MR-3. It may be noted that Section 143(12) includes only fraud by officers or employees of the company and does not include fraud by third parties such as vendors and customers.
8. Identification and Reporting of the events/ actions having major bearing on Auditee’s affairs
8.1 It shall be the duty of the Auditor to identify and report in the Secretarial Audit Report all events/ actions having major bearing on the Auditee’s affairs in pursuance of the applicable laws, act, rules, regulations, guidelines, standards, etc.
8.2 An event/ action shall be considered as having major bearing on Auditee’s affairs if it affects its going concern or alters the charter or capital structure or management or business operation or control, etc.
Events having a major bearing on Auditee’s Affairs
1. The Auditor should assess and identify the material action or events having bearing on the Auditee’s affairs in pursuance of the applicable laws, act, rules, regulations, guidelines, standards, etc. and report accordingly.
2. The identification of the corporate actions or events having bearing on the Auditee’s affairs in terms of applicable laws, act, rules, regulations, guidelines, standards, etc. is a subjective matter and needs to be concluded keeping in mind various parameters. Such parameters may include the following:
a. The consideration involved in the transaction as a percentage of the consolidated turnover, net worth or profit;
b. The transaction whether or not in the ordinary course of business;
c. The transaction representing a significant shift from the company’s strategy;
d. The omission of an event or information is likely to result in significant market reaction if the said omission came to light at a later date.
3. Further, following actions or events may be considered to have a bearing on the Auditee’s affairs:
a. Future plans of Merger or Amalgamation.
b. Revision in Rating(s).
c. Fraud/ defaults by promoter or key managerial personnel or by listed entity or arrest of key managerial personnel or promoter.
d. Agreements [viz. shareholder agreement(s), joint venture agreement(s), family settlement agreement(s) (to the extent that it impacts management and control of the listed entity), agreement(s)/ treaty(ies)/ contract(s) with media companies)], which are binding and not in normal course of business, revision(s) or amendment(s) and termination(s) thereof.
e. Corporate Debt Restructuring.
4. The Auditor should clearly disclose that all the material non-compliances and transactions are reported and all the non-material non-compliances and transactions are ignored in the secretarial audit report.
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