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 result 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.
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.
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 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