Introduction: A recent case involving M/s. Sun Pharmaceutical Industries and M/s. CJ Goswami & Associates, their Practicing Company Secretary, has highlighted the consequences faced by a secretarial auditor for their failure to report material related party transactions in their audit report. This case serves as a significant reminder that practicing company secretaries cannot hide behind the argument that financial statements are solely examined by statutory auditors, as they are also responsible for disclosures in the financial statements.
Background: The Ministry of Corporate Affairs (MCA) initiated an investigation into the affairs of M/s. Sun Pharmaceutical Industries Limited for the financial years 2014-15, 2015-16, 2016-17, and 2017-18 under Section 206(4) of the Companies Act 2013. Subsequently, a show cause notice was issued to the secretarial auditor for their failure to report Aditya Medisales Limited as a related party in the audit reports for the aforementioned financial years, as required by IndAS-24 / AS-18.
FACTS OF THE CASE
i. The Ministry of Corporate Affairs (MCA) directed an investigation into the affairs of M/s. Sun Pharmaceutical Industries Limited under Section 206(4) of the Companies Act 2013 for the financial years 2014-15, 2015-16, 2016-17, and 2017-18.
ii. Following the investigation, the regulator issued a show cause notice to the secretarial auditor for failing to report Aditya Medisales Limited as related parties in the secretarial audit report issued to the company for the financial years 2014-15, 2015-16, and 2016-17, as required by IndAS-24 / AS-18..
iii. In response to the regulator’s notification, M/s C.J. Goswami & Associates made a written response on December 22, 2022, which was recorded by the Registrar of Companies.
iv. Following that, because the Registrar of Companies was dissatisfied with the reply given by the practising company secretaries firm, he issued a personal hearing notice, setting the personal hearing for March 28th, 2023.
On the day of the hearing, the Practising Company Secretaries presented significant data stating:
i. The Ministry of Corporate Affairs had already prescribed the format for the secretarial audit report in form no MR-3 under the provision of section 204 of the Companies Act, and the Institute of Company Secretaries of India decided at its 226th meeting on November 21, 2014, that the provisions relating to the audit of the company’s accounts and financial statements are dealt with by the statutory auditors or other designated professionals.
ii. The PCS further submitted that based on the reports given by the statutory auditors for the reporting period, the practicing secretarial auditors firm believed that the company was in compliance with the provisions of section 133 of the Companies Act 2013 relating to the accounting standards.
a. The PCS also stated that, based on the statutory auditors’ reports for the reporting period, the practising secretarial auditors firm thought that the company was in accordance with the accounting standards provisions of Section 133 of the Companies Act 2013.
b. In addition to the foregoing, the PCS informed the Registrar of Companies that the Institute of Company Secretaries of India had issued a guidance note from time to time to help / assist the Institute’s members in carrying out secretarial audit responsibilities. PCS also supplied an excerpt from the ICSI guiding notes issued on May 14, 2018.
SUBMISSIONS MADE BY THE PRESENTING OFFICER
i. The Presenting Office also claimed that instead of complying with his obligation under section 188 of the Companies Act 2013, the secretarial auditor just relied on the statutory auditors report.
ii. The provisions relating to audit of accounts and financial statements of company were dealt with in the statutory audit, according to the scope of secretarial audit as decided by the ICSI at its 226th meeting, and the secretarial auditor may rely on the report given by the statutory auditor or other designated professional may be only partially significant.
iii. Because the clause respecting related parties under Sections 2(76) and 188 of the Companies Act 2013 fell under the scope of the company’s secretarial auditor. According to the ICSI’s guidance note on secretarial audit, non-reporting of related parties in fiscal years 2014-15, 2015-16, and 2016-17 fell under the ambit of the secretarial auditor’s obligation.
THE ORDER ISSUED BY THE COMPANY REGISTRAR / ADJUDICATING OFFICER
After considering the facts and circumstances stated by the Presenting Officer, counter submissions made by the secretarial auditor, and the aforementioned facts and circumstances, the Registrar of Companies and Adjudicating Officer had reasonable cause to believe that the secretarial auditor of the company had failed to discharge their duty as per the provisions of section 143(14) read with sections 188 and 204 of the Companies Act 2013 read with the Guidance Note issued.
Order and Penalty: After considering the facts, counter submissions, and relevant provisions, the Registrar of Companies and Adjudicating Officer found that the secretarial auditor had failed to fulfill their duty as per the provisions of section 143(14) read with sections 188 and 204 of the Companies Act 2013, as well as the issued Guidance Note. Consequently, a penalty of Rs. 50000 was imposed on the auditor for each of the 3 financial year, resulting in a total penalty of Rs. 150,000.
This case serves as an eye-opening order by the Registrar of Companies, emphasizing the obligations of company secretaries to thoroughly audit all aspects of the company, including compliance with the Companies Act of 2013. It highlights the importance of reviewing disclosures in financial statements and the auditor’s report. Moreover, it underscores the responsibility of professionals certifying documents such as MGT-7 and MGT-8 to ensure compliance with the provisions of the Companies Act before certification.
Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES, Company Secretary in Practice from Delhi, can be contacted at email@example.com.