Introduction to secretarial audit

In today’s complex business environment, maintaining corporate compliance is of utmost importance for companies operating in India. The regulatory landscape is constantly evolving, and failure to comply with the various laws and regulations can have severe consequences. To ensure adherence to legal requirements, companies often rely on secretarial audits. In this article, we will delve into the significance of secretarial audit in India, its scope, process, and the role of Company Secretaries (CS) professionals in performing this critical function.

Understanding the importance of corporate compliance in India

Corporate compliance refers to the adherence of a company to the laws, regulations, and guidelines set forth by the government and regulatory bodies. It encompasses various aspects such as financial reporting, corporate governance, statutory compliance, and ethical practices. In India, corporate compliance is governed by numerous laws, including the Companies Act, of 2013, the Securities and Exchange Board of India (SEBI) regulations, and the Reserve Bank of India (RBI) guidelines. Failure to comply with these provisions can lead to penalties, legal disputes, and damage to a company’s reputation. To ensure compliance, companies undertake secretarial audits.

What is secretarial audit?

Secretarial audit is an independent verification process conducted to ensure that a company is compliant with the applicable laws, rules, and regulations. It involves a thorough examination of the company’s records, documents, and procedures by a qualified CS professional. The objective of the secretarial audit is to identify any non-compliance, gaps, or irregularities and recommend corrective measures. It assures the management, shareholders, and stakeholders that the company is in compliance with the legal requirements and follows best corporate governance practices.

The legal framework for secretarial audit in India

The Companies Act, of 2013, introduced the concept of secretarial audit in India. Section 204 of the Act mandates certain classes of companies to undertake secretarial audits and obtain a secretarial audit report. According to the Act, secretarial audits are necessary for enterprises with a paid-up share capital of at least ₹50 crore or a revenue of at least ₹250 crore.  Additionally, certain other classes of companies as prescribed by the government also need to comply with this requirement. The secretarial audit report must be annexed to the company’s annual report and submitted to the regulatory authorities.

Who can conduct a secretarial audit?

A secretarial audit can only be conducted by a qualified CS professional who is a member of the Institute of Company Secretaries of India (ICSI). The CS professional must have a valid certificate of practice issued by the ICSI. The role of the CS professional in conducting a secretarial audit is crucial, as they possess the necessary knowledge and expertise in company law, corporate governance, and regulatory compliance. They are responsible for examining the company’s statutory records, books of accounts, minutes of meetings, and other relevant documents to assess compliance and identify any deviations or non-compliance.

Scope of secretarial audit for private companies

While the secretarial audit is mandatory for certain classes of companies, private companies not falling within the ambit of mandatory secretarial audit can voluntarily opt for this audit. Private companies often choose to undergo secretarial audits to ensure good governance practices, mitigate compliance risks, and enhance their credibility. The scope of secretarial audits for private companies includes a comprehensive review of their compliance with the applicable laws, rules, and regulations. It covers areas such as maintenance of statutory registers, filing of necessary forms and returns, convening and conducting of meetings, compliance with labor laws, and adherence to corporate governance norms.

Key areas covered in a secretarial audit

A secretarial audit examines various key areas to determine the compliance status of a company. The following are only a few of these areas:

• Company Law Compliance: This involves assessing compliance with the provisions of the Companies Act, 2013, such as maintenance of statutory registers, filing of annual returns, and disclosure of director’s interests.
• Corporate Governance: The audit evaluates the company’s adherence to corporate governance principles, including composition and functioning of the Board of Directors, appointment and remuneration of key managerial personnel, and disclosure of related-party transactions.
• Securities Law Compliance: It ensures compliance with SEBI regulations relating to insider trading, listing obligations, and disclosure requirements.
• Labor Law Compliance: The audit assesses compliance with labor laws such as the Employees’ Provident Fund and Miscellaneous Provisions Act, the Employees’ State Insurance Act, and the Payment of Bonus Act.

Process and procedures involved in conducting a secretarial audit

The process of conducting a secretarial audit involves several steps to ensure a comprehensive review of a company’s compliance status. The CS professional assigned to conduct the audit follows a systematic approach that includes:

• Understanding the Business: The auditor gains a thorough understanding of the company’s business operations, organizational structure, and legal requirements specific to the industry.
• Planning: The auditor develops an audit plan, which includes the scope of the audit, the identification of key areas to be examined, and the timeline for conducting the audit.
• Examination of Records: The auditor reviews the company’s statutory registers, books of accounts, minutes of meetings, agreements, contracts, and other relevant documents to assess compliance and identify any deviations.
• Interviews and Discussions: The auditor conducts interviews with key personnel, including directors, officers, and employees, to gather information and clarify any doubts or concerns.
• Reporting: Based on the findings of the audit, the auditor prepares a secretarial audit report, highlighting the compliance status, identifying areas of non-compliance, and recommending remedial measures.

Role of a CS professional in performing a secretarial audit

The role of a qualified CS professional in performing a secretarial audit is critical to ensuring the effectiveness and credibility of the audit process. The CS professional brings in-depth knowledge of company law, regulatory compliance, and corporate governance practices. They possess the expertise to identify non-compliance, assess risks, and recommend appropriate measures to ensure compliance. CS professionals play a dual role as auditors and advisors, assisting companies in maintaining good governance practices, mitigating compliance risks, and enhancing their overall corporate image.

Benefits of secretarial audit for private companies

Private companies that voluntarily opt for secretarial audits can reap several benefits from this proactive approach. Some of the key benefits of secretarial audit for private companies include:

• Enhanced Compliance: Secretarial audit helps companies identify and rectify any non-compliance or irregularities, ensuring adherence to the applicable laws and regulations.
• Risk Mitigation: By conducting a secretarial audit, companies can mitigate compliance risks and minimize the potential for penalties, legal disputes, and reputational damage.
• Good Governance Practices: Secretarial audit promotes good governance by ensuring transparency, accountability, and ethical practices within the organization.
• Stakeholder Confidence: The audit report provides assurance to shareholders, lenders, investors, and other stakeholders that the company is compliant and follows best corporate governance practices.

Challenges and common issues in secretarial audit

While secretarial audit plays a vital role in ensuring corporate compliance, it is not without its challenges. Some of the common challenges faced during a secretarial audit include:

• Lack of Documentation: Inadequate or incomplete documentation makes it difficult for auditors to assess compliance accurately.
• Non-cooperation: Resistance or non-cooperation from company management or employees can hinder the audit process and impact its effectiveness.
• Dynamic Regulatory Environment: The constantly changing legal and regulatory landscape poses challenges in keeping up with the latest requirements and ensuring compliance.
• Interpretation of Laws: Different interpretations of laws and regulations can lead to inconsistencies in compliance assessments.

Best practices for successful secretarial audit

To ensure a successful secretarial audit, companies should adopt the following best practices:

• Regular Internal Audit: Companies should establish an internal audit function to review compliance regularly and address any issues proactively.
• Document Management System: Implementing a robust document management system helps maintain accurate and up-to-date records, making it easier for auditors to assess compliance.
• Compliance Calendar: Maintain a compliance calendar that outlines all the statutory and regulatory deadlines, ensuring timely filing of forms, returns, and disclosures.
• Training and Awareness: Conduct regular training sessions to educate employees about compliance requirements, the importance of corporate governance, and ethical practices.

Conclusion

In conclusion, secretarial audit plays a crucial role in ensuring corporate compliance in India. It helps companies identify non-compliance, mitigate risks, and maintain good governance practices. The process involves a thorough examination of a company’s records, documents, and procedures by a qualified CS professional. By voluntarily opting for secretarial audits, private companies can enhance their compliance, mitigate risks, and build stakeholder confidence. Despite the challenges faced during the audit process, implementing best practices and adopting a proactive approach can lead to successful auditing outcomes. To stay ahead in the competitive business landscape and safeguard their reputation, companies should prioritize secretarial audits as an integral part of their compliance framework.