Secretarial Audit is a process to verify the compliance of various legislations, including the Companies Act and other corporate laws applicable to the company. It ensures that the company adheres to all the necessary legal and procedural requirements. This audit is conducted by a qualified Company Secretary in Practice and is mandatory for certain classes of companies as per the Companies Act, 2013. The primary objective of the Secretarial Audit is to strengthen corporate governance and ensure that companies are operating within the legal framework.
Secretarial Audit provides necessary comfort to stakeholders, including regulators, shareholders, creditors, and others, that the company is complying with the applicable laws and has effective systems in place. The Secretarial Auditor gathers sufficient and appropriate evidence by performing various audit procedures, evaluates the evidence, and presents a report based on their findings.
Responsibility of the Secretarial Auditor
The Secretarial Auditor is responsible for planning and performing the audit to obtain reasonable assurance regarding the company’s compliance with legal and procedural requirements. This responsibility includes following prescribed auditing procedures from the time of engagement to the submission of the audit report. The duty extends even after submission of the audit report, as the auditor may be required to attend the Annual General Meeting.
The Secretarial Auditor must adhere to the requirements laid down under the Companies Act, 2013, along with relevant Rules, Listing Regulations, SEBI circulars, and guidelines issued by the Institute of Company Secretaries of India. Additionally, the auditor must comply with the applicable Auditing Standards (CSAS 1-4), Guidance Notes, Secretarial Audit Manual, Peer Review and Quality Review Guidelines, and the Unique Document Identification Number framework.
Conduct and professional ethics play a significant role in the Secretarial Audit process. The auditor must carry out the audit with a sense of integrity, independence, and confidentiality. Maintaining confidentiality is of utmost importance, especially in listed companies where the leakage of unpublished price-sensitive information could lead to insider trading and other violations under the SEBI regulations.
Qualitative Aspects in Conducting Secretarial Audit
While performing the Secretarial Audit, the auditor must be aware of certain qualitative factors, including the nature of the business, history of the company and its promoters, business cycles, volume of transactions, legal environment, and internal compliance systems. The auditor must professionally perform the engagement and assess the specific circumstances of the auditee to determine the appropriate audit procedures.
In planning the audit, the auditor must maintain a high standard of professional skepticism and judgment. These qualities are essential for identifying risks and ensuring that the audit procedures provide a reasonable basis for the auditor’s opinion.
Planning and Performing Secretarial Audit
Planning is one of the foundational aspects of a successful audit. It involves determining the nature, scope, and timing of audit procedures and ensuring the efficient execution of the audit plan. The planning process also includes identifying significant areas of risk and determining how those risks will be addressed during the audit.
The Secretarial Auditor must develop an understanding of the company’s structure, industry, operations, internal controls, and regulatory environment. Based on this understanding, the auditor will design and perform procedures to gather sufficient appropriate audit evidence. This involves test-checking of records, evaluating controls, and obtaining representations from management.
Once the audit evidence is gathered, it is evaluated for sufficiency and appropriateness. The evaluation forms the basis for the auditor’s opinion regarding the extent of the company’s compliance with applicable laws and regulations. Based on the findings, the auditor prepares a draft report and, upon finalisation, submits the report to the auditee.
Stages of Secretarial Audit
The Secretarial Audit process can be broken down into multiple stages that represent the life cycle of an audit engagement. These stages reflect the steps taken by the auditor from initial client contact through the submission of the final report and attending the AGM.
Accepting an Audit Engagement
Before accepting any audit engagement, the auditor must perform certain preliminary procedures to ensure that the assignment is appropriate and that the auditor is in a position to perform it competently and independently. These procedures include assessing the integrity of the client, understanding the business, evaluating any potential conflicts of interest, and ensuring that the auditor has the necessary expertise and resources.
The auditor may also need to communicate with the previous auditor, if any, to understand the history of the engagement and any significant issues that may have arisen during the previous audit. This step promotes professional courtesy and helps maintain the integrity of the profession.
Planning the Audit
The planning phase involves setting the audit’s scope and objectives and determining the extent and timing of audit procedures. The auditor prepares an audit plan that outlines the key risk areas, compliance requirements, documentation needed, and resources to be deployed. Planning also includes determining materiality levels and deciding the nature and extent of sampling and test-checks.
A well-prepared audit plan serves as a roadmap and enables efficient execution while ensuring that all significant areas are covered during the audit.
Understanding the Entity and Its Environment
An in-depth understanding of the company’s structure, industry, operational processes, internal controls, and legal compliance framework is essential for conducting an effective audit. This understanding helps in assessing the risk of non-compliance and identifying the specific laws and regulations that are applicable to the company.
The auditor must evaluate the company’s governance framework, decision-making processes, and historical compliance practices. This insight enables the auditor to identify risk-prone areas and tailor the audit procedures accordingly.
Assessing Risks of Non-Compliance
Risk assessment is an essential component of planning and performing an audit. It involves identifying areas where there is a high probability of non-compliance or material misstatement. Based on the understanding gained during the previous stage, the auditor assesses the likelihood and impact of such risks.
This assessment helps the auditor decide where to focus audit efforts and what procedures are necessary to address the identified risks. High-risk areas may require more extensive testing and detailed evaluation.
Determining Materiality
Materiality refers to the significance of an error or omission in the context of the overall compliance status of the company. The auditor must define thresholds of materiality based on the nature and size of the company and the specific risks involved.
Determining materiality helps in deciding the extent of audit procedures and the evaluation of audit evidence. It ensures that the auditor’s opinion is not based on immaterial or insignificant matters.
Performing Audit Procedures
This stage involves executing the planned audit procedures. These may include inspection of documents, inquiry with management, observation of processes, and re-performance of certain control activities. Audit procedures can be categorized into tests of controls and substantive procedures.
Test of controls focuses on evaluating the effectiveness of the company’s internal control system, while substantive procedures involve verifying transactions and balances for compliance and accuracy.
Maintenance of Audit Documentation
Audit documentation is essential to support the auditor’s findings and conclusions. It includes working papers, checklists, analysis, correspondence, and evidence obtained during the audit. Proper documentation provides a clear audit trail and serves as proof that the audit was conducted under applicable standards.
The auditor must ensure that documentation is complete, accurate, and securely preserved. The documentation should also reflect the auditor’s judgment and the rationale for the conclusions drawn.
Evaluating the Evidence
Once all audit procedures are performed, the auditor evaluates the sufficiency and appropriateness of the evidence collected. This evaluation helps in forming a conclusion about the company’s level of compliance.
If the evidence supports that the company has adhered to the applicable laws and regulations, the auditor may issue an unmodified report. If there are instances of non-compliance, the auditor must determine the impact and whether it necessitates a modified report.
Forming an Audit Opinion
Based on the evaluation of audit evidence, the auditor forms an opinion about the company’s compliance status. This opinion is documented in the Secretarial Audit Report, which may include qualifications, adverse remarks, or be unmodified depending on the findings.
The opinion must be supported by audit evidence and reflect a fair assessment of the company’s compliance posture. The auditor should be objective, unbiased, and clear in the expression of the audit opinion.
Drafting the Secretarial Audit Report
The audit report is the final product of the audit process and communicates the auditor’s opinion to the stakeholders. It must be prepared in the prescribed format and include all necessary disclosures.
The report should specify whether it is modified or unmodified. In case of modifications, the reasons and impact must be explained. The report must be dated, signed, and include a Unique Document Identification Number for authentication.
Submitting the Report and Presence at AGM
After finalising the audit report, the auditor submits it to the company’s Board of Directors. The report must be addressed appropriately and submitted promptly. The auditor is also required to attend the Annual General Meeting unless formally exempted by the company.
Presence at the AGM ensures that the auditor can clarify any queries regarding the audit findings and provide additional insights if needed.
Applicability of Secretarial Audit
Section 204 of the Companies Act, 2013, makes it mandatory for certain classes of companies to annex a secretarial audit report with their board report. The following classes of companies are required to conduct a secretarial audit and annex the secretarial audit report with the Board’s Report: (a) Every listed company; (b) Every public company having a paid-up share capital of fifty crore rupees or more, or a turnover of two hundred fifty crore rupees or more. The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, also empower the Central Government to prescribe additional classes of companies to which the secretarial audit shall apply. In addition to these provisions, Regulation 24A of the SEBI (LODR) Regulations, 201, also mandates secretarial audit and annual secretarial compliance reports from practicing company secretaries for listed entities and their material unlisted subsidiaries incorporated in India. These provisions aim to strengthen corporate governance and ensure statutory compliance among companies of a certain scale and nature.
Companies Exempt from Secretarial Audit
Private companies and small public companies that do not meet the thresholds mentioned in Section 204 are exempt from the mandatory requirement of a secretarial audit. However, these companies may voluntarily opt for a secretarial audit as a measure of good governance. Exemptions apply only as long as the company’s paid-up capital or turnover remains below the prescribed limits. If in any financial year the thresholds are crossed, a secretarial audit becomes mandatory from that year onward. It is also worth noting that while a secretarial audit is not mandatory for these exempted entities, regulators and stakeholders are increasingly encouraging voluntary adoption for enhanced compliance and risk management.
Qualifications of a Secretarial Auditor
Only a member of the Institute of Company Secretaries of India (ICSI) holding a Certificate of Practice (CoP) is eligible to conduct a secretarial audit. This means that the auditor must be a practicing company secretary. In the case of a firm of company secretaries, any partner of the firm who is a member of ICSI and holds a valid CoP can conduct the audit. The rationale is to ensure that the audit is conducted by professionals who are adequately trained and equipped to assess compliance with a broad range of legal requirements. The secretarial auditor should also be independent of the company and not involved in the management or other consulting activities that might impair their objectivity.
Appointment of Secretarial Auditor
The Board of Directors must formally appoint the secretarial auditor through a board resolution passed at a duly convened board meeting. The appointment must be made well in advance to provide sufficient time for conducting the audit before the preparation of the Board’s Report. The resolution should clearly state the name of the company secretary in practice or the firm, their CoP number, and their period of appointment. It is advisable to also inform the auditor in writing and obtain their consent for the assignment. Companies should not delay the appointment to avoid last-minute compliance pressures and to ensure that the audit is comprehensive.
Duties and Responsibilities of Secretarial Auditors
The primary duty of the secretarial auditor is to verify whether the company is complying with the applicable provisions of corporate laws and other related laws. The auditor must identify the statutes applicable to the company and verify the status of compliance against each. The secretarial auditor is also responsible for evaluating the systems and processes followed by the company to ensure compliance. If any non-compliance or procedural lapses are identified, the auditor is required to report them objectively. In addition, the auditor may make recommendations for strengthening the compliance framework of the company. The responsibility includes ensuring that the company has adhered to good governance practices, maintained proper records, and made necessary disclosures as required by law.
Scope of Secretarial Audit
The scope of secretarial audit is not limited to the Companies Act, 2013. It extends to other applicable laws, rules, regulations, and standards which may include: (a) The Securities Contracts (Regulation) Act, 1956; (b) The Depositories Act, 1996; (c) The Foreign Exchange Management Act, 1999; (d) SEBI Regulations such as the SEBI (LODR) Regulations, 2015, SEBI (Prohibition of Insider Trading) Regulations, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, and others; (e) Industry-specific laws applicable to the company; (f) Secretarial Standards issued by the ICSI and approved by the Central Government. The secretarial auditor must make an assessment of all these laws to the extent they apply to the company’s operations and report any deviations or non-compliance. The broad scope ensures a holistic review of the legal and governance framework of the company.
Responsibilities of the Company Secretary in Secretarial Audit
The company secretary plays a pivotal role in conducting the secretarial audit. As a compliance officer and governance professional, their primary responsibility is to ensure that the company adheres to applicable legal and regulatory requirements. This includes preparing the secretarial audit report in Form MR-3, conducting a comprehensive check of statutory registers, records, and filings, and ensuring adherence to board processes, meetings, and resolutions. The company secretary must also verify compliance with corporate laws, secretarial standards, and provisions of other laws as applicable to the company. The professional is expected to be objective, independent, and transparent while carrying out the audit. They are also responsible for maintaining the confidentiality of information obtained during the audit and for identifying any non-compliance or procedural lapses, suggesting corrective actions, and ensuring that these are appropriately addressed by the management.
Key Documents and Records Reviewed During Secretarial Audit
A thorough secretarial audit involves reviewing a wide array of statutory documents and records to assess compliance. Some of the key documents include the Memorandum and Articles of Association of the company, minutes books of board and general meetings, statutory registers such as register of members, directors, charges, and loans, records of shareholding patterns and changes, filings made with the Registrar of Companies (ROC), stock exchanges, and other regulatory authorities, board resolutions and policies such as the code of conduct, whistleblower policy, and risk management policy. Compliance with applicable provisions of corporate laws, SEBI regulations, listing obligations, environmental laws, labor laws, FEMA regulations, and industry-specific legislations is also verified. The company secretary must also examine financial statements to ensure disclosures are made as per applicable provisions and that proper governance practices are followed in board processes and stakeholder engagement.
Secretarial Audit Report – Format and Contents
The format of the secretarial audit report is prescribed under Form MR-3 as per Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. The report must be issued by a practicing company secretary and should clearly state whether, in the opinion of the auditor, the company has complied with applicable provisions of laws, rules, and regulations. The report contains sections detailing the auditor’s observations, qualifications, reservations, or adverse remarks, if any, on compliance matters. It also includes the scope of the audit, the basis of forming an opinion, and recommendations for improvement in processes or rectification of non-compliance. The report must mention the specific laws that were examined, the books and records verified, and any irregularities noted during the audit. It concludes with the signature, stamp, membership number, and certificate of practice number of the practicing company secretary. The secretarial audit report is annexed to the Board’s Report and filed with the ROC, making it a matter of public record and a key indicator of corporate governance standards in the company.
Compliance with Secretarial Standards
Compliance with secretarial standards is a critical component of the secretarial audit process. The Institute of Company Secretaries of India (ICSI) has issued Secretarial Standards (SS-1 and SS-2) relating to meetings of the board of directors and general meetings. These standards are mandatory and must be complied with by all companies to which they apply. SS-1 deals with the conduct, notice, agenda, quorum, minutes, and related matters concerning board meetings, while SS-2 outlines the procedures for convening and conducting general meetings, including notice, voting, attendance, and disclosures. The secretarial auditor is required to verify whether the company has adhered to these standards in letter and spirit. Any deviation or non-compliance must be reported along with suitable recommendations. The proper observance of secretarial standards demonstrates a company’s commitment to structured governance and transparency, while non-compliance may raise questions about the integrity of board processes and stakeholder engagement.
Identifying and Reporting Non-Compliance
One of the core functions of a secretarial audit is identifying instances of non-compliance with applicable laws and regulations. These may range from procedural lapses such as delayed filings, incomplete disclosures, or incorrect maintenance of statutory records, to more serious violations like non-compliance with regulatory requirements or default in payment of statutory dues. The secretarial auditor is expected to use professional judgment in determining the materiality of such non-compliance and whether it warrants reporting in the audit report. Each non-compliance must be documented along with its implications, root causes, and possible remedial measures. The auditor must also assess whether the non-compliance was willful or inadvertent and evaluate the steps taken by the management to correct the lapses. Recommendations for systemic improvements should also be provided where applicable. The purpose is not only to report non-compliance but also to act as a tool for continuous improvement in governance and internal control mechanisms.
Corrective Measures and Follow-up Actions
The identification of non-compliance or procedural lapses during the secretarial audit should be followed by timely and effective corrective actions by the company’s management. The secretarial auditor may suggest specific actions to address the gaps, such as timely filing of overdue forms, updating statutory registers, revising policies, improving documentation practices, or enhancing board processes. The company needs to implement these measures promptly to avoid regulatory penalties and reputational damage. In many cases, a follow-up audit or review may be undertaken to assess the status of corrective actions and ensure their effectiveness. The board of directors and audit committee should also review the findings of the secretarial audit and oversee the implementation of remedial measures. A culture of continuous compliance and proactive governance, supported by regular follow-up, helps the company maintain a strong regulatory posture and demonstrates its commitment to accountability and transparency.
Challenges Faced During Secretarial Audit
While a secretarial audit is crucial for ensuring compliance, it does come with its own set of challenges. One of the major issues is the unavailability or delayed availability of documents from the management. This can delay the audit process and affect the completeness of the report. Another challenge is the dynamic nature of laws and regulations. With frequent amendments to corporate laws, secretarial standards, and SEBI regulations, staying updated becomes a continuous task. Additionally, a lack of cooperation from various departments within the organization may hinder the smooth conduct of the audit. At times, companies may treat secretarial audits as a mere formality and fail to recognize their importance, which can lead to incomplete or inaccurate disclosures. Also, the scope of the audit can be vague if not clearly defined at the outset, leading to disagreements or confusion between the auditor and the company. Timely reporting of discrepancies and ensuring implementation of corrective actions may also pose practical difficulties.
Best Practices for Conducting a Secretarial Audit
To overcome challenges and enhance the quality of secretarial audits, certain best practices can be followed. First and foremost, the auditor should develop a detailed audit plan that outlines the scope, objectives, timelines, and responsibilities. A checklist of applicable laws, rules, and secretarial standards should be maintained. Proper communication with the company’s management and relevant departments is key. It is important to collect and review documents systematically and maintain clear documentation for all observations and findings. Regular updates on legal changes and periodic training for the audit team can greatly enhance competence. The auditor should be objective, unbiased, and maintain confidentiality at all times. It is advisable to highlight major concerns or non-compliances to the management promptly so that corrective actions can be initiated. The final audit report should be comprehensive, structured, and presented professionally.
Secretarial Audit under SEBI Regulations
Listed companies and their compliance with SEBI regulations form a significant component of secretarial audits. SEBI, as a market regulator, imposes various obligations on listed entities, which the secretarial auditor needs to verify. This includes compliance with Listing Obligations and Disclosure Requirements (LODR) Regulations. It covers disclosures related to board meetings, financial results, related party transactions, shareholding patterns, corporate governance requirements, and more. In addition, compliance with SEBI (Prohibition of Insider Trading) Regulations and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations may also be examined. The auditor must assess the timely filing of reports with stock exchanges, disclosures made to shareholders, and the existence of proper systems to ensure fair disclosure of material information. Since any lapse in SEBI compliance may attract penalties or investor mistrust, a meticulous approach is essential.
Secretarial Audit for Unlisted Companies
Although a secretarial audit is mandatory only for certain classes of companies, many unlisted companies voluntarily undertake it as a governance measure. For unlisted public companies and private companies falling under prescribed thresholds, a secretarial audit brings transparency and discipline in compliance. It helps in identifying procedural lapses, missed filings, or weak internal controls. Even for companies not covered under mandatory requirements, a periodic secretarial review can significantly contribute to regulatory preparedness and risk mitigation. The audit for such entities typically focuses on their compliance with Companies Act provisions, maintenance of statutory registers and records, board processes, filings with the Registrar of Companies, and adherence to applicable laws depending on the industry in which they operate.
Role of the Company Secretary in Secretarial Audit
The Company Secretary of the company plays a pivotal role in facilitating the secretarial audit. As a compliance officer and key managerial personnel, the Company Secretary is responsible for maintaining statutory records, ensuring adherence to board procedures, and providing documents and information to the auditor. Their cooperation is vital for the smooth conduct of the audit. However, it is important to note that the internal Company Secretary is not involved in performing the audit; it is the practicing Company Secretary appointed externally who carries it out independently. The internal CS must, therefore, act as a bridge between the auditor and the management, ensuring full access to records, coordinating with other departments, and implementing the recommendations made in the audit report.
Limitations of Secretarial Audit
Despite its benefits, a secretarial audit has certain inherent limitations. It is primarily a compliance audit and does not delve into financial accuracy or performance analysis. The audit is based on the documents and information provided by the company, and any concealment or misrepresentation may remain undetected. The auditor’s observations are based on sampling and may not cover every transaction in detail. Additionally, there are limitations in verifying compliance with non-statutory internal policies or informal practices unless explicitly covered in the scope. Further, the effectiveness of the audit depends on the competence and diligence of the auditor, and subjective interpretation of laws can sometimes result in differing conclusions.
Differences Between Statutory Audit and Secretarial Audit
While both statutory audit and secretarial audit aim at ensuring accountability, their scope and objectives differ. Statutory audit focuses on financial statements, assessing whether they reflect a true and fair view of the company’s financial position. It is conducted by Chartered Accountants and mandated under the Companies Act. In contrast, a secretarial audit focuses on compliance with legal and procedural aspects, ensuring that the company operates within the legal framework. It is conducted by Company Secretaries in Practice and primarily examines board processes, statutory registers, filings, and other non-financial compliance matters. Another key difference is that a statutory audit is mandatory for all companies above a certain size, whereas a secretarial audit is required only for specific classes of companies.
Emerging Trends in Secretarial Audit
With the evolving regulatory landscape and increasing emphasis on governance, secretarial audits are expected to become more comprehensive. There is a trend towards integrating secretarial audit with overall compliance management systems. Companies are adopting compliance software and digital tools to streamline recordkeeping, track filings, and generate compliance alerts. This enables auditors to perform more efficient audits and reduces the risk of non-compliance. The scope of secretarial audit is also expanding to cover areas such as ESG (Environmental, Social, and Governance) disclosures, cybersecurity policies, and data protection practices. In some jurisdictions, secretarial audit is being aligned with global compliance standards, especially for companies with cross-border operations. There is also a growing demand for secretarial audit to assess the effectiveness of internal controls and board dynamics, going beyond procedural compliance.
Impact of Secretarial Audit on Stakeholders
Secretarial audit has a positive impact on various stakeholders of a company. For shareholders, it provides assurance that the company is adhering to corporate laws and safeguarding investor interests. For regulators, the audit acts as a tool to ensure that companies are complying with legal provisions and standards of governance. For the board and management, it acts as a compliance check mechanism that identifies gaps and areas of improvement. For creditors and financial institutions, a clean secretarial audit report enhances the company’s credibility. It also plays an important role in due diligence exercises during mergers, acquisitions, or investments, offering an independent view on the company’s legal and procedural health. Overall, secretarial audit fosters transparency, accountability, and stakeholder confidence.
Case Studies and Real-World Examples
Several real-world instances highlight the importance of secretarial audits. In cases where companies failed to comply with board composition requirements or delayed filing of resolutions, the audit reports served as an early warning. In some companies, a secretarial audit uncovered procedural lapses in the appointment of directors or related party transactions, prompting timely corrective actions. For example, a listed company was found non-compliant with SEBI regulations regarding disclosure of board meetings, and the same was flagged by the secretarial auditor. The company took immediate measures to rectify the lapse and implement stricter controls. In another case, the secretarial audit of an unlisted public company revealed outdated statutory registers and missing shareholder approvals, leading to a complete revamp of their compliance system. These examples underscore the preventive and corrective value of secretarial audits.
Recommendations for Improving Secretarial Audit Effectiveness
To improve the overall effectiveness of secretarial audits, both auditors and companies can take certain proactive steps. Auditors should ensure adequate training, maintain independence, and follow a structured methodology. Companies should be open to the audit process, provide timely and complete information, and treat the findings as a means to improve compliance. The scope of the audit should be well-defined and aligned with the nature and size of the business. Regular internal secretarial reviews can help in early detection of issues before the formal audit. Adoption of compliance automation tools and maintaining updated records will also aid in efficient audits. Further, regulators may consider expanding the mandatory coverage of secretarial audit to more companies and industries over time to strengthen governance frameworks.
Conclusion
Secretarial audit is a vital compliance mechanism that ensures companies adhere to the legal and procedural framework within which they operate. It supports corporate governance, mitigates risks, and enhances transparency. While it has its limitations and challenges, adherence to best practices and active involvement of all stakeholders can maximize its benefits. As the business environment becomes increasingly complex, the relevance of secretarial audit will only grow. Companies that view it as a strategic tool rather than a statutory obligation stand to gain long-term advantages in terms of compliance confidence, stakeholder trust, and sustainable governance.