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Secretarial audits are vital for ensuring that companies comply with various laws and regulations. This guide provides a detailed overview of the secretarial audit process, approach, and key considerations for both companies and Practicing Company Secretaries (PCS).
A secretarial audit encompasses a thorough examination of a company's records and documentation by an independent auditor or a specialized firm. The objective is to confirm compliance with a myriad of laws, regulations, and guidelines governing the company's operations. This includes corporate, securities, labor, environmental, and taxation laws, among others.
The secretarial audit aims to assess compliance with all applicable laws, rules, and procedures while ensuring good governance. The auditor evaluates systems and processes related to Board and shareholder approvals, legal operations, and the maintenance of relevant records. Additionally, the Secretarial Auditor shares their opinion regarding whether the company's systems align with its size and operations.
The Secretarial Auditor's Report assesses the extent of the company's compliance with various laws governing board processes and compliance management systems. To effectively report on these matters, a Company Secretary in Practice should possess:
An audit involves an analytical examination of business records by a qualified person, verifying documents, registers, filings, and clarifications provided by clients.
The audit's scope determines:
Audits should comprehensively address relevant areas while ensuring appropriate verification through checklists. Techniques for auditing may include:
These methods should be tailored for the secretarial audit context. For example, when verifying the shareholder register, it may be impractical to review every entry if the number of records is extensive. Hence, it is essential to apply diligent sampling techniques to form a fair opinion on the documentation.
The Institute of Company Secretaries of India has issued a Guidance Note regarding secretarial audits, outlining their definition, benefits, processes, approaches, and scopes. This also includes checklists for five mandatory laws as per Form MR-3.
According to Section 143 of the Companies Act, 2013, the provisions regarding auditor powers and duties also apply to Company Secretaries in Practice conducting secretarial audits under Section 204.
Upon appointment, the new Secretarial Auditor must notify the previous auditor in writing, as stipulated by Clause (8) of Part I of the first schedule of the Company Secretaries Act, 1980.
The company must issue a formal appointment letter to the secretarial auditor, who should accept it in writing.
Performing thorough research about the company is essential. The auditor should engage with staff to gain insights into operations and may conduct surveys to collect relevant information.
Holding a preliminary meeting with senior management and relevant staff establishes expectations and the audit timeline. The auditor will outline the scope and objectives, assess existing controls, and draft the audit plan.
Creating a well-defined audit strategy is crucial, clearly outlining tasks, fieldwork responsibilities, and risk assessments. A comprehensive checklist should ensure all facets of the audit are covered.
The auditor is responsible for validating that identified controls are operational. Fieldwork includes formal and informal interviews, document reviews, and compliance testing.
Audit documentation is pivotal, linking management records to the auditor's conclusions. These papers are crucial throughout the audit process.
The auditor must obtain a signed management representation letter from a senior company official, providing essential audit evidence.
Audit findings should be summarized and discussed with management for clarification.
After management reviews, the auditor will prepare the secretarial audit report using Form MR-3, intended for the company's members but initially presented to the Board. The report will detail the auditor’s opinion on legal compliance.
Any qualifications or adverse comments in the report ought to be clearly stated. If constraints limit the auditor's work scope, these must also be noted in the report.
The Board of Directors must address any issues raised in the audit within their report, ensuring stakeholders are informed.
Companies should undertake the following to prepare for a secretarial audit:
As specified in Section 204, companies must assist the Secretarial Auditor in their assignments. Thus, it is crucial for the directors or company secretary to provide the necessary information for an efficient audit.
Secretarial audits are essential for ensuring legal and regulatory compliance in organizations. By adhering to the principles and guidelines outlined in this guide, companies and PCS can effectively conduct secretarial audits, reducing risks and bolstering corporate governance. Compliance is not only a legal obligation; it also plays a significant role in maintaining business credibility and trust.