Escalating Precincts of Secretarial Audit By FCS Jaya Sharma-Singhania and Mehul Solanki



One should also perform the work to set an example for the good of the world. Whatever actions great persons perform, common people follow. Whatever standards they set, all the world pursues.
 
Every individual plays a leadership role. One of the most significant hitches today is that leaders do not practice this value. Leaders think they are above Board and in several cases, these ideas stretch to such a level that they being to believe that they are “above the law”.
 

 
For if a leader does not carefully perform the prescribed duties, all leaders will follow him blindly in all respects.
 
With this background, the authors intend to discuss the ever-evolving scope of “Secretarial Audit” with the responsibility of the Company Secretary, who are the torch bearers in this field.
 
BACKGROUND:
 
        
 
“Secretarial Audit” also referred to as non-financial Audit is a comprehensive tool to check compliance of various legislations including the Companies Act and other corporate and economic laws applicable to the company. The Secretarial Auditor expresses an opinion as to whether there exist adequate systems and processes in the company commensurate with the size and operations of the company to monitor and ensure compliance with applicable laws, rules, regulations and guidelines.
 
Secretarial Audit helps to detect the instances of non-compliance and facilitates taking corrective measures. It audits the adherence of good corporate practices by the company. It is, therefore, an independent and objective assurance intended to add value and improve the operations of the company. It helps to accomplish the organisation’s objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
 
Secretarial Audit thus provides necessary comfort to the management, regulators and the stakeholders, as to the statutory compliance, good governance and the existence of proper and adequate systems and processes. Secretarial Audit facilitates monitoring compliances with the requirements of law through a formal compliance management programme which can produce positive results to the stakeholders of a company. The Secretarial Audit provides an in-built mechanism for enhancing corporate compliance generally and helps to restore the confidence of investors in the capital market through greater transparency in corporate functioning.
 
SECRETARIAL AUDITOR AND APPLICABILITY:
 
Only a member of the Institute of Company Secretaries of India holding a certificate of Practice (Company secretary in Practice) can conduct Secretarial Audit and furnish the Secretarial Audit Report to the company. [Section 204(1) of Companies Act, 2013].
 
As per section 204(1) of Companies Act, 2013 read with rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the following companies are required to obtain Secretarial Audit Report:
 
  • Every listed company;
  • Every Public Company having a paid-up share capital of fifty crore rupees or more; or
  • Every Public Company having a turnover of two hundred fifty crore rupees or more.
  • Every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more.
  • The format of the Secretarial Audit Report shall be in Form No. MR 3.
 
“Turnover” means the aggregate value of the realisation of the amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year. [Section 2(91)].
 
Regulation 24A of SEBI (LODR) regulations, 2015 provides that, every listed entity and its material unlisted subsidiaries incorporated in India shall undertake secretarial Audit and shall annex with its annual Report, a secretarial audit report, given by a company secretary in practice, in such Form as may be specified with effect from the year ended March 31, 2019.
 
EVOLUTION & JOURNEY OF SECRETARIAL AUDIT:
 
The frauds and scams in recent years in India like Satyam fraud, the Harshad Mehta Scam, Sarada Chit fund Scam, the Sahara Scam, the Satyam scam have rekindled the thought on the need for high standards of corporate governance and stringent provisions to tackle fraud, which needs to be above the tick the box approach.
 
  • 2002: The Naresh Chandra Committee Report on Corporate Audit and Governance recommended the introduction of Compliance audit;
  • 2003: Later in the year 2003, the Ministry introduced the Companies (Amendment) Bill, 2003, containing essential provisions in the arena of independence of auditors, the relationship of auditors with the management of the company, independent directors to improve the corporate governance practices in the corporate sector;
  • 2004: The Bill introduced the concept of Secretarial Audit; powers were given to Central Government to order, at any time, the secretarial compliance audit of the company for any period. Similarly, Concept Paper published by MCA in 2004, contemplating to enact a new Company Law included the concept of the Secretarial Compliance Audit.
  • 2009: ICSI Recommendations to Strengthen Corporate Governance Framework (Dec 2009): The Satyam fiasco in January 2009 led to a re-look at the corporate governance provisions. Considering the revelations, the Institute analysed the issues arising out of Satyam Episode and among other things made suitable recommendations for policy and regulatory changes in the legal framework. After a detailed study of the best corporate governance practices, the recommendations included Secretarial Audit as a measure to enhance investor protection.
The recommendation is reproduced as under:
 
ICSI Recommendation 14:

Secretarial Audit should be made mandatory in respect of listed companies and certain other companies. A Company Secretary in Practice conducts the Secretarial Audit. The secretarial Auditor shall submit the Report on the Audit of secretarial records to the Corporate Compliance Committee of the Board of Directors of the Company. The Secretarial Audit Report should form part of the Board’s Report.
           
Corporate Governance Voluntary Guidelines, 2009 released on December 21, 2009, insisted on adoption of Secretarial Audit for public companies and private companies, particularly the bigger ones.
 
Para V of the Guidelines states that:
 
“Since the Board has the overarching responsibility of ensuring transparent, ethical and responsible governance of the company, it is important that the Board processes and compliance mechanisms of the company are robust. To ensure this, the companies may get the Secretarial Audit conducted by a competent professional. The Board should give its comments on the Secretarial Audit in its Report to the shareholders.”
 
The Parliamentary Standing Committee on Finance in its 21st Report on Companies Bill, 2009 has recommended the Ministry to suitably incorporate the new sub-clause 178A in the Companies Bill relating to Secretarial Audit.
 
The draft clause provided for secretarial Audit for more prominent companies, it ensured that every company having a paid-up share capital of rupees five crore or more or such other amount as may be prescribed by Central Government from time to time shall annex with its Board‘s Report made in terms of subsection (3) of section 120 of the Act, a Secretarial Audit Report given by a company secretary in practice.
 
Further, the relevant extracts of the debates/ discussions on secretarial Audit at the committee are as under:
 
7.8 Secretarial Audit may also be mandated for bigger companies, including all listed companies; as it inter-alia provides necessary assurance to the investors that the affairs of the company are being conducted following the legal requirements. The Board of Directors shall, in their Report to shareholders, explain in full any qualification or observation or other remarks made by the company secretary in practice in his secretarial audit report.
 
  • 2013: The Companies Act, 2013, incorporates various revolutionary provisions on good corporate governance. The Act boosts investor confidence and market sentiments and codifies disclosure of not just financial but also the non-financial aspect.
 
The Act has placed immense responsibility on the Directors for stakeholder’s protection. Section 166 of the Act defines the duties of the directors, one of the duties emphatically profess the stakeholder’s protection. It states that a director of a company shall act in good faith to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment.
 
The Directors Responsibility Statement as required under Sec 134(5) states that the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively. Moreover, the Listing Agreement provides that the Board shall periodically review compliance reports of all laws applicable to the company, prepared by the company as well as steps taken by the company to rectify instances of non-compliance.
 
The Act relies on the pillars of good corporate governance; hence emphasis has been placed on the relevance of a robust compliance management system in an organisation. It is the responsibility of the Company Secretary under section 205 of the Act to report to the Board about compliance with the provisions of this Act, the rules made thereunder and other laws applicable to the company.
 
Secretarial Audit postulates verification on a test basis of records, books, papers and documents to check compliance with the provisions of various statutes, laws and rules & regulations by a Company Secretary in Practice to ensure compliance of legal and procedural requirements and processes. Secretarial Audit is; therefore, an independent and objective assurance intended to add value and improve operations of a company. It helps to accomplish the organisation’s objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
 
SECRETARIAL AUDIT AND COMPLIANCE MANAGEMENT:
 
The compliance system and processes in a company are dependent mainly on the following factors: Nature of business (es).
  1. The geographical domain of its area of operation(s);
  2. Size of the Company both in terms of operations as well as investments, technology, the multiplicity of business activities and workforce employed;
  3. Jurisdictions in which it operates;
  4. Whether the company is a listed company or not;
  5. Regulatory authority (ies) concerning its business operations;
  6. Nature of the Company viz., private, public, government company, etc.
 
Based on the above, the Secretarial Auditor can constitute a broad idea about the desired system and process to be adopted by a company. For example, a multi-product / multi-operation company is supposed to comply with all the applicable corporate laws in addition to the regulatory framework appropriate at products/ operations.
 
At the corporate level, monitoring of such a complex web of compliances is generally made on a back-to-back mechanism. In such cases, Boards’ reporting on observances are made based on reports/certification provided by field-level management. As a better compliance structure in such cases, it is desired to have an internal checking mechanism about the quality of such Report either regularly or sample basis.
 
Nowadays, most of the large companies have adopted Enterprise Resource Planning (ERP) Systems to cater to their complex operations. In many cases, the compliance system becomes a part of these modules.
 
Auditing in such systems requires the Auditor to enter and to have access within the system. While taking up the audit assignment, the Auditor needs to ensure that access would be given so that the assessment of the proper operation and process of compliance is made.
 
Auditing of the compliance system and the process is not a fault-finding exercise, preferably a device to scale up compliance mechanism of a company commensurate to its size and operations. It is desired that the Secretarial Auditor as an expert in corporate compliance would advise the companies to build up a robust organisational compliance system in case the system appears to be insufficient during the audit process.
 
SECRETARIAL AUDIT AND CS AUDITING STANDARDS:
 
The Companies Act, 2013 has introduced the concept of Secretarial Audit (Audit) for Bigger Companies to have third party professional assurance in the areas of governance, compliances and disclosures by the companies. A Practicing Company Secretary (PCS) who is holding Certificate of Practice (CoP) have been cast an exclusive responsibility to undertake such Audit of companies.
 
Secretaries have been authorised first time undertake and perform Auditing function under the Companies Act. PCS is required to provide his “Secretarial Audit Report” (Audit Report) in Form MR-3 according to the provisions of Section 204(1), and Rule 9 of the Companies (Appointment & Remuneration Personnel) Rules 2014 to the members of the company.
PCS issued first such audit reports for the FY 2014-15. The present limits for companies to have mandatory secretarial Audit is as under:
 
  • All listed companies; or
  • Public Companies having paid-up share capital of Rs. 50 cr or more; or
  • Public Company having a turnover of Rs 250 Cr or more.
 
PCS has also been cast a duty to detect and report the frauds in the Companies while performing the duties as Auditor. Initially, many challenges were there in conducting audits and in developing auditing acumen and undertaking the function of detection of frauds.
 
Accordingly, ICSI has taken initiatives in the area of Auditing and to strengthen the auditing acumen and detection abilities of PCS it was decided to develop the auditing techniques and tools to undertake secretarial audits of other companies.
 
The ICSI has setup an Auditing Standards Board for laying down the foundations of Company Secretaries Auditing Standards (CSAS) in India and for the inculcation of best auditing practices among its members.
 
Observance of ICSI auditing for standards by PCS, will lead to good governance, compliance and transparency among the companies. It will also help the PCS to comply with its essential function of detection and reporting of frauds.  
 
AUDITING STANDARDS ISSUED BY ICSI:
 
The Council of the Institute of Company Secretaries of India (ICSI) has approved the issuance of four ICSI Auditing Standards. The Standards are required to be observed by the Company Secretaries undertaking Audits. The Standards seek to promote best auditing practices, uniformity and consistency while conducting audits.
 
The four Standards explicitly:
 
  • CSAS-1: Auditing Standard on Audit Engagement which lays down the Auditor’s role and responsibilities concerning an Audit Engagement and the process of entering into an understanding/agreement with the Appointing Authority for the purpose of Audit;
  • CSAS-2: Auditing Standard on Audit Process and Documentation which lays down the responsibilities and duties of the Auditor concerning Audit Process in conducting Audit and maintaining proper audit records;
  • CSAS-3: Auditing Standard on Forming of Opinion covers the basis and manner for forming Auditor’s opinion on the subject matter of the Audit;
  • CSAS-4: Auditing Standard on Secretarial Audit covers the basis and manner for carrying out the Secretarial Audit.
CONCLUSION:
 
It is a matter of pride that India is the first country to have mandated Secretarial Audit. Good Corporate Governance is the norm, and the Indian Companies cannot ignore it any more. The Companies Act, 2013 has carved out a significant new role for the Company Secretaries.
 
We need to outgrow our vision from the narrow perspective of “what is in it for me?” to an opportunity to make a difference to Corporate India and the place that we as professionals do associate with.
 
The Regulators has reposed tremendous trust and confidence on the profession and has cast enormous responsibility on the Secretarial Auditor and the Corporate Management to set a benchmark on proper corporate administration and governance, acceptable not only to the Indian investors but also fair to the international business community.
 
BIBLIOGRAPHY:
 

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