Secretarial Audit for Companies: Why is it mandatory for Companies?

Ashish M. Shaji

13 Sep, 2022

Secretarial audit is a part of compliance management in a Company. The secretarial audit for companies is done in order to check various compliances under the Companies Act 2013 and other applicable laws on the company. It is a mechanism that monitors compliance with the requirements of law.

Which companies should conduct Secretarial Audit?

Now we will discuss which companies are required to conduct a Secretarial Audit. The mandatory provisions about applicability of secretarial audit are provided below.

Here are the following companies required to obtain a secretarial audit report from the secretarial auditor under Section 204 (1) of the Companies Act 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014:

• Listed Company;
• Public Company having paid up share capital of rupees 50 crores or more and having a turnover of rupees 250 crores or more.
• A company having outstanding loans or borrowing from banks/public financial institutions of 100 crore rupees or more.

Turnover implies an aggregate value of the realization of the amount of sale and supply or distribution of goods or services rendered by the company during the financial year.

The Secretarial Audit report shall be made in form MR 3 according to Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014^[1].

Secretarial Report is required to be annexed to the board report for the companies falling under the criteria specified in section 204(1).

Companies other than the companies falling under the criteria specified under section 204(1) may also obtain the secretarial audit report voluntarily.

Who can conduct a Secretarial Audit for Companies?

A member of the Institute of Company Secretaries of India having Certificate of Practice can conduct the secretarial audit according to Section 204(1) of the Companies Act 2013. The secretarial report shall be furnished in form MR 3 by the secretarial auditor of the company. An employed company secretary who is not in whole time practice cannot conduct a secretarial audit. There is no restriction on the number of audits that can be conducted by the company secretary in practice in one financial year.

Who is required to sign a Secretarial Audit Report?

The report shall be signed by the secretarial auditor who is engaged in conducting a secretarial audit by the company whereas in the case of a firm it shall be signed by the partner under whose supervision audit has been conducted.

Appointment of Secretarial Auditor for Companies

The secretarial auditor is appointed by the company by passing a resolution in board meeting according to Rule 8 of the Companies (Meetings of the Board and its powers) Rules 2014. It is required for the secretarial auditor to obtain the letter of engagement from the company and formally accept the letter of engagement. Once the consent of the secretarial auditor is received, file a certified true copy of the resolution that was passed in the board meeting with ROC in MGT-14.

In the case of a change in secretarial auditor, it is required to be reported to the members of the board report.

Reporting of Fraud

In case during the course of audit, the secretarial auditor has reason to believe that offense involving fraud has been committed or in the case of an offense committed against the company by its employees/officers, the auditor is required to immediately report the same to the Central Government within the specified time frame and in such manner as prescribed.

Council has issued guidelines specifying the number of companies required to be audited by a company secretary in practice which will be effective taking up secretarial audit assignments for the year 2015-2016 onwards. Few suggestions have been received by the Institute on the number of companies to be audited.

Is Secretarial Audit Applicable to Private Companies?

As per the provision of Companies Act, it states that company which is a subsidiary of a public company shall be deemed to be a public company even if such a company is a private company in its article. In relation to secretarial audit every private company which is a subsidiary of a public company, which falls in the prescribed class of companies, is required to conduct an audit.

In a case of contravention of the provision of secretarial audit, an officer in default or company secretary in practice shall be punishable by the fine.

Why is Secretarial Audit mandatory for Companies?

It is mandatory considering the benefits that it provides. Some of them are as follows:

• It checks and reports on compliances of applicable laws;
• It points out non-compliance and inadequate compliances;
• It safeguards the interest of the stakeholders;
• It helps in avoiding unwarranted legal actions or penalties.

The Process of Secretarial Audit for Companies

After the appointment of the Secretarial Auditor, initial discussion takes place about the company with such auditor. The scope and objective is identified and thereafter the audit programme is finalized and the staff is briefed. An analysis is then made through discussion and understanding the process. Then the working papers are prepared and after observation and summary findings, finally the Secretarial Audit report is submitted.

It may be noted that the secretarial auditor is required to consider the following while preparing the audit report:

• Instances of non-compliance during audit period;
• Any litigation initiated by the company or filed against the company.

Conclusion

 Secretarial audit for companies adds value and improves the overall functioning of an organization. It can improve risk management effectiveness that’s why it’s mandatory for companies.

Read our article:Can a struck off company get restored?