Secretarial audit plays a crucial role in ensuring compliance with various laws and regulations for companies. This guide provides a comprehensive overview of the process, approach, and key considerations involved in conducting secretarial audits for both companies and Practicing Company Secretaries (PCS).
SECRETARIAL AUDIT
A secretarial audit involves an exhaustive examination of a company’s records and documentation conducted by an independent auditor or a firm with expertise in such audits. The main goal of this audit is to verify the company’s adherence to a wide range of laws, rules, regulations, and guidelines that govern its operations. This includes ensuring compliance with corporate laws, securities laws, labor laws, environmental laws, taxation laws, and any other relevant regulatory mandates.
PROCESS OF SECRETARIAL AUDIT
A Secretarial Audit is a process to check compliance with the provisions of all laws applicable specifically to the company and rules/regulations/procedures; adherence to good governance practices with regard to the systems and processes of seeking and obtaining approvals of the Board and/or shareholders, as may be necessary, for the business and other activities of the company, carrying out activities in a lawful manner and maintenance of minutes and records relating to such approvals or decisions. The Secretarial Auditor also expresses an opinion as to whether there exists systems and processes in the company commensurate with the size and operations of the company.
APPROACH TO SECRETARIAL AUDIT
The object of Secretarial Auditor’s Report is to undertake evaluation and form an opinion and to report to the shareholders as to whether, and if so, to what extent the company has complied with the laws complied with the laws comprising various statues, rules, regulations, guidelines about the board processes and existence of compliance management system. This required knowledge of the corporate laws, economic laws, securities laws, FEMA, and other laws specifically applicable to the company.
To be able to give an effective report, a Company Secretary in Practice is expected to have the following:
- Knowledge: While conducting the Audit, the Secretarial Auditor should have the knowledge of exact nature and activities of the company and the laws which are applicable to the company.
- Team: He is required to ensure that he has a team of appropriately trained staff, who can support the preparation of the report.
- Documentation and backup: He is expected to develop a manual & checklists which will help in documentation process. He is required to keep proper record of documents checked during the audit process.
- Third party supporting and evidences: It would be helpful to check filing made by the company at MCA & other authorities independently.
- Adhering to the timelines: Schedule set to conduct the audit process should be strictly adhered to in order to gain the confidence of the client and boost the expertise level of the team.
- Honesty and impartiality: A Company Secretary in Practice has the professional duty to provide an unbiased and honest view. He should not have any kind of interest in the company being audited.
- Maintaining audit diary: The audit process needs to be done professionally and the verifications done by the team members should be recorded daily.
- Back up papers to be maintained: The secretarial auditor should maintain audit diary and back up papers as these will provide the audit evidence for defending himself in any possible allegation of misconduct in future.
GENERAL PRINCIPLES/GUIDELINES WHILE CONDUCTING SECRETARIAL AUDIT
Audit is an intelligent and critical examination of the books and records of business done by an independent qualified person. It is done by process of verification of documents, registers, filings, information, systems, procedures and explanations received from the clients.
Audit scope determines the time involved in audit exercise, depth of auditing, aspects to be covered etc. Audit scope depends on, relevant legal provisions, nature of audit, objectives of audit & terms of engagement.
The Audit should be organized to cover adequately all aspects of the enterprises as far as they are relevant to the audit objectives. Appropriate verification has to be done with the help of checklists.
Therefore, certain techniques of sample checking and test checking should be applied before forming a reasonable opinion regarding the document. There are no specific modalities or stringent practices applicable for conducting secretarial audit. It is a well-established principle that an auditor is not expected to carry out a 100% checking of every piece of paper and information available in the company. Therefore, he verifies the final facts and figures represented in the end document.
The following are general techniques of auditing:
- Sample checking
- Test checking
- Random checking
- Trial and error checking
The same techniques may be applied and adopted in secretariat audit. For instance, while verifying the list of past and present shareholders, a company secretary practice cannot be expected to check every folio of the Register of Members, whose number could run into lakhs. Similarly, the number of share transfers registered in a year could run into thousands. If one is expected to check every transaction in these matters, it could be well almost impossible to meet the statutory time limits for completing the audit assignment.
Therefore, certain techniques of sample checking and test checking should be applied before forming a reasonable opinion that the document being certified projects a true and fair view of the state of affairs. The following guiding principles be adopted while deciding about the extent of checking that is required:
- The need for every detailed checking is greatly reduced if there are adequate measures of internal controls and checks and balances built into the systems and procedures of the organization.
- The principle of materiality is another important concept. The sample chosen for detailed checking should be representative of the whole.
- High risk areas could be identified and subjected to more extensive scrutiny than others.
GUIDANCE NOTE ON SECRETARIAL AUDIT
The Institute of Company Secretaries of India has published a Guidance Note on Secretarial Audit highlighting the meaning, benefits, process, approach and scope of Secretarial Audit. This note also provides checklists with respect to five mandatory laws as specified in Form MR-3.
RIGHTS AND DUTIES OF SECRETARIAL AUDITOR UNDER THE COMPANIES ACT, 2013
Section 143 of the Companies Act, 2013 deals with powers and duties of Auditors. Sub-section (14) of the section provides that the provisions of this section shall mutatis mutandis apply to the Company Secretary in Practice conducting Secretarial Audit der section 204. The said section reads as under:
COMMUNICATION TO EARLIER INCUMBENT
Whenever a practicing Company Secretary is appointed as Secretarial Auditor in place of the existing Secretarial Auditor, he should communicate such appointment to the earlier incumbent in writing as per Clause (8) of Part I of the first schedule of the Company Secretaries Act, 1980.
ACCEPTANCE OF APPOINTMENT
A formal letter of appointment should be issued by the company to the secretarial auditor along with the copy of board resolution. The secretarial auditor shall accept the same in writing.
PRELIMINARY DISCUSSIONS AND SURVEYS
Gathering pertinent details about the firm is crucial. The individual performing the secretarial audit should undertake a comprehensive examination of the company’s activities and engage with the staff to understand the business’s essence. They might also conduct surveys to accumulate insights regarding the organization.
PRELIMINARY MEETING
The preliminary meeting with the senior management and the staff involved in be 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 finalized. The secretarial auditor shall discuss the scope and objectives of the audit, gather information on important Board processes, evaluate existing control systems and prepare the audit plan.
FINALIZATION OF AUDIT PLAN AND BRIEFING THE STAFF
Crafting a detailed audit strategy is crucial. This strategy should include a clear explanation of tasks distribution, fieldwork duties, and various responsibilities to the audit team. It ought to thoroughly detail the fieldwork processes and the application of audit instruments. Assessing control mechanisms enables auditors to identify the most significant risk zones and tailor tests for the fieldwork phase. Ensuring the audit plan is timely followed is vital. A comprehensive checklist for every part of the secretarial audit needs to be devised, and the audit team must be adequately briefed and prepared prior to the start of the audit.
TESTING, INTERVIEWS AND ANALYSIS
The secretarial auditor has access to diverse tools and technologies for collecting data on the company’s operational processes. It is the auditor’s responsibility to verify if the controls identified in the initial assessment are functioning correctly and as described by the company. Fieldwork generally involves both formal and informal interviews with company personnel, examination of procedural documents, evaluation of processes, and testing and analysis to ensure compliance with relevant policies, procedures, laws, rules, and regulations, as well as evaluating the effectiveness of control mechanisms.
WORKING PAPERS
Audit documentation plays a crucial role in the auditing process, serving as the foundation for the auditor’s final opinion. These documents create a link between the management’s records and the auditor’s conclusions. They are detailed, serving multiple purposes throughout the audit.
MANAGEMENT REPRESENTATION LETTER
The practicing Company Secretary is required to secure a management representation letter from the auditee company. This letter should be authorized and signed by a key figure such as the Company Secretary, Managing Director, or a member of the Senior Management with the requisite authority. This letter serves as a crucial piece of audit evidence for the Secretarial Auditor.
AUDIT SUMMARY FOR DISCUSSIONS
The findings during the course of audit shall be summarized and presented for initial discussions with the management for their views/ clarifications/replies.
SUBMISSION OF SECRETARIAL AUDIT REPORT
Upon reviewing the management’s responses and clarifications, the secretarial auditor is tasked with drafting the secretarial audit report using Form No. MR. 3. Although this report is directed towards the company’s members, it must be formally presented to the Board. Within the report, the auditor will articulate their opinion regarding the company’s adherence to compliance measures, specifying whether the company has fulfilled its obligations under the applicable legal framework.
REPORTING WITH QUALIFICATION
Any qualification, reservation or adverse remarks, if any, should be stated by the Secretarial Auditor at the relevant places in his report in bold type or in italics.
If the Secretarial Auditor is unable to express an opinion on any matter, he should mention the same with reasons therefor. If the scope of work is limited due to restrictions imposed by the company or any other reason, the report should indicate such limitations.
Additionally, the Board of Directors is required to thoroughly address any qualifications, observations, or remarks put forth by the Company Secretary in Practice within the Secretarial Audit Report in their Board’s report. This necessitates a detailed explanation from the Board to clarify these points, ensuring that stakeholders are fully informed about the audit findings and the company’s stance or actions taken in response.
STEPS FOR PREPARING FOR SECRETARIAL AUDIT
Following steps should be following by a company to prepare for secretarial audit:
- Compliance Programme: lt is essential for every company to have a compliance Management system in place that is updated from time to time. The system generally covers aspects such as its objective, list of applicable laws, compliance risk management framework, establishment of systems and processes for effective compliance, appointment of chief compliance officers, compliance ownership and so on.
- Team: Ensuring adherence to various legal and regulatory requirements is crucial for a company to prevent unnecessary legal challenges. A company can establish a dedicated team of officers tasked with ensuring compliance under different statutes.
- Maintenance of records: Regarding record-keeping, it’s imperative for organizations across all tiers to engage in the diligent maintenance of accurate records. Employees should be made aware of the critical role of a robust record management system and the necessity of having these records readily accessible for inspection.
- Preparation of Compliance Chart: To further streamline compliance efforts, a company may create a Compliance Chart tailored to the various laws and regulations applicable to its operations. Opting for a customized chart that aligns with the company’s unique needs offers a more effective approach to managing compliance tasks.
- Conduct compliance awareness Programme: the company may organize such programmes at different levels to make the employees aware about the requirement and importance of compliances and penalty for non- compliances.
Section 204 provides that it is the duty of the company to assist the Secretarial Auditor in all his assignment for conducting the secretarial audit.
However, it becomes an inseparable responsibility of the working directors/company Secretary of the company to provide the required information to the Company Secretary in practice to enable him to conduct the Audit in timely and efficient manner.
Conclusion: Secretarial audit is an essential process for companies to ensure adherence to legal and regulatory requirements. By following the guidelines and principles outlined in this guide, companies and PCS can effectively conduct secretarial audits, mitigate risks, and enhance corporate governance. Compliance is not just a legal requirement but also a vital aspect of maintaining trust and credibility in the business environment.
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DISCLAIMER:- This Blog is for the purposes of information/knowledge and shall not be treated as solicitation in any manner or for any other purposes whatsoever.
Feel free to contact the author for further clarification at 9953808432 or via mail at [email protected]. The author is the founder of SINGHANIA & ASSOCIATES (Practicing Company Secretaries Firm) based in Delhi.
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