In addition to Statutory Audit and Internal Audit, listed companies have to undertake a Secretarial Audit. A Secretarial Auditor is a Practicing Company Secretary, who is tasked with checking whether a listed company is compliant with the provisions of all laws and regulations that are applicable to it. He/she is also tasked with checking whether the relevant books, records and registers, that a company has to maintain under law, are in proper order, and complete as on the date of the audit.
The Companies Act, 2013 (the Act) introduced the concept of Secretarial Audit for the first time in 2014. As per the Act, the Secretarial Auditor is appointed by the Board of Directors. His/her report has to be annexed to the Board report (in the Annual report of the company). In the event of the Auditor raising any qualification, observation or other remark(s), the Board has to explain the same in its report. Further, the Act has given the responsibility of reporting any fraud, to all the auditors, including the Secretarial Auditor.
SEBI LODR Regulations, 2015 (LODR) expanded the scope of Secretarial Audit, in 2018, by stating that all material unlisted subsidiaries of a company too will have to undertake a Secretarial Audit from FY 2018-19.
In addition to an “Annual secretarial audit report”, in February, 2019, SEBI also introduced an “Annual secretarial compliance report”. While the former was to be a broad check on compliance with all laws and regulations applicable to the company (as mentioned in the Act), the latter was to focus on all SEBI Regulations and circulars/ guidelines that were applicable to a listed entity. Further, the former is to be submitted to the Board of Directors, and the latter is to be submitted by the listed company to the Stock Exchanges.
The format of the Annual Secretarial Audit report has been given under the Act. It is interesting to note that the ICSI has added some disclaimers to the language of the said format, which results in a huge reliance being placed on the disclosures made by the management and the Company Secretary to the respective Boards.
The format of the Annual Secretarial Compliance Report has been given by SEBI. It is divided into 3 major categories.
- Reporting on deviations, if any, from regulations/ circulars of SEBI, along with the observation/remark of the PCS.
- Details of actions taken, if any, against the listed company, its promoters, directors or material subsidiaries by SEBI or Stock Exchanges.
- Action taken by the listed entity on any observations of the PCS in the previous year, and the observations/ remarks on the same by the PCS.
ICSI has issued Auditing Standards for Secretarial Audit. These deal with the Auditor’s roles and responsibilities in relation to audit, and refer to the understanding/agreement with the management of a company for the purpose of audit. The Standards seek to promote best auditing practices, uniformity and consistency while conducting audits.
ICSI has also prescribed a limit on the number of audits that an Auditor can undertake. These have been capped at 10 Secretarial Audits per partner/ PCS, and an additional limit of 5 Secretarial Audits per partner/PCS, in case the unit is peer-reviewed. There is also a ceiling on the number of secretarial compliance reports that an auditor can issue. These have been capped at 5 reports individually / per partner in each FY, and an additional limit of 5 reports individually / per partner in case the unit has been peer-reviewed.
While a lot of importance has been placed on Secretarial Audit, this process suffers from some problems.
- The Company Secretary usually suggests to the Board, the PCS firm to be appointed as a Secretarial Auditor. However, very rarely does the Board meet the PCS one-on-one during the year. As a result, the PCS ends up being accountable for his action to the Company Secretary, whose work he/she is supposed to audit. Also, usually the PCS firm helps the Company Secretary with filling some forms. These forms are also part of the audit process, thereby leading to a conflict of interest.
- The Secretarial audit report has to report on compliance with all laws and regulations applicable to a company. However, in most cases, the PCS ends up taking the list of laws and regulations from the company itself, thereby defeating the major purpose of the exercise.
- A huge reliance is placed on management representation and the compliance certificate placed by the Company Secretary to the Board.
- The report is hedged by using words such as “company is generally compliant”.
- SS1 and SS2 seem to have some disconnect with LODR. On some matters, the Standards seem to not factor in the provisions of LODR. One such example is that LODR makes it compulsory for the Chairperson of the Audit Committee to be present at the AGM, whereas, SS2 makes this a discretionary requirement. Often this non-compliance is not stated in the Secretarial auditors’ report.
- The fee paid to the Secretarial auditor is not usually enough to ensure that he/she or his/her representatives visit all the factories/ offices of the company to ensure compliance.
Secretarial Audit promotes good corporate practices in the company. It provides necessary comfort to the Board, shareholders, Regulators, and other stakeholders on the status of compliances and the existence of proper and adequate systems and processes.
The role of the Secretarial Auditor is important, especially since law and regulations have tasked the Board of a company with ensuring compliance. The least that the Board can do is meet the PCS without the presence of management, at least annually.
Prerna Mohan and Divyani Garg