Secretarial Audit, as mandated under Section 204 of the Companies Act, 2013,, is often perceived as a compliance check limited to secretarial records and company law requirements. However, its scope is much broader.
A robust Secretarial Audit goes beyond verifying registers, filings, and procedural compliance. It encompasses a review of financial transactions, governance practices, and management decisions that may impact the company’s statutory and regulatory standing. This is because:
1. Interconnected Nature of Compliance: Financial transactions often have legal implications—related party transactions, loans, investments, guarantees, and borrowings must comply with company law, SEBI regulations, FEMA, and other applicable laws.
2. Detection of Irregularities: Unusual or non-compliant financial transactions may indicate potential fraud, mismanagement, or statutory violations that can affect stakeholders’ interests.
3. Holistic Corporate Governance: Secretarial Audit ensures the company adheres not only to secretarial requirements but also to the larger framework of corporate governance, transparency, and accountability.
In essence, Secretarial Audit is an independent assurance on the company’s overall legal and regulatory health, encompassing both secretarial and financial aspects to provide a true picture to stakeholders.
Secretarial Audit: Unlocking Insights from the Balance Sheet
Secretarial Audit, mandated under Section 204 of the Companies Act, 2013,, is a compliance check mechanism that ensures companies operate within the legal and regulatory framework. Conducted by a Practising Company Secretary (PCS), this audit is not merely a compliance tick-box; it is a diagnostic tool to safeguard corporate governance standards. One of the most powerful tools in a Secretarial Auditor’s arsenal is the company’s Balance Sheet, which reveals much more than just numbers—it uncovers compliance health, governance gaps, and potential risks.
Why is Reading the Balance Sheet Crucial in Secretarial Audit?
- Identify non-compliance with laws relating to loans, investments, borrowings, and related party transactions.
- Ensure compliance with statutory limits under Companies Act, 2013,, SEBI regulations, FEMA, and other applicable laws.
- Correlate financial disclosures with Board and shareholder approvals.
- Detect red flags like frequent inter-corporate loans, misuse of reserves, or excessive managerial remuneration.
Key Areas in Balance Sheet for Secretarial Audit
Share Capital: Verify changes in authorized, issued, and paid-up share capital; ensure PAS-3, SH-7 filings and Section 62/42 compliance.
Reserves and Surplus: Check purpose and utilization of reserves; validate classification of free reserves.
Borrowings: Scrutinize borrowings for compliance with Sections 180, 179(3)(d), and 185; verify charges registration.
Loans & Advances: Ensure compliance with Section 186; examine related party transactions under Section 188.
Investments: Scrutinize investments for compliance with FEMA, SEBI, and Board approval requirements.
Managerial Remuneration: Verify Sections 197 & Schedule V compliance.
Contingent Liabilities: Look for legal or regulatory disputes with governance implications.
Real-Life Case Laws Influenced by Balance Sheet Analysis
M/s Faurecia India Pvt. Ltd.: Penalty of ₹12 lakh each imposed on company and officers for failing to obtain Secretarial Audit Report despite significant borrowings.
Shree Bankey Behari Exports Ltd.: Violation for not attaching Secretarial Audit Report to the Board’s Report despite being mandatory.
Globe Motors Ltd.: Court emphasized auditors must go beyond formal compliance and assess true conduct and fiduciary intentions.
Statutory vs. Secretarial Auditor Principle: Clarified that secretarial auditors should rely on financial documents but remain vigilant for fraud.
Red Flags for Secretarial Auditors
- Frequent capital restructuring without proper disclosures.
- Unsecured loans to group companies without approvals.
- High related party transactions with inadequate reporting.
- Non-registration of charges despite borrowings.
- Dividends declared without adequate free reserves.
Conclusion
A Secretarial Audit is more than compliance—it is corporate governance in action. The Balance Sheet, when read with a compliance-focused lens, acts as a roadmap to uncover statutory lapses and governance pitfalls. A diligent Secretarial Auditor not only identifies irregularities but also adds value by guiding management toward a culture of transparent, ethical, and lawful corporate functioning.
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