AN ANALYSIS BY CS
KUNDAN KR MISHRA
Introduction
According to Wikipedia the term Auditing is defined as a
systematic and independent examination of data, statements, records, operations
and performances (financial or otherwise) of an enterprise for a stated
purpose. In any auditing the auditor perceives and recognizes the propositions
before him/her for examination, collects evidence, evaluates the same and on
this basis formulates his/her judgment which is communicated through his/her
audit report.
Companies Act, 2013 prescribed four different kinds of Audits for
companies, namely Internal Audit, Statutory Audit, Cost Audit and Secretarial
Audit.
a)
The
purpose of Internal auditing is an independent, objective assurance and
consulting activity designed to add value and improve an
organization's operations. Its objective is to bring a systematic,
disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
Internal auditors are employed by Board of Directors to perform the internal
auditing activity.
b)
The
purpose of a Statutory audit is to determine whether an organization is
providing a fair and accurate representation of its financial position by
examining information such as bank balances, bookkeeping records and financial
transactions.
c)
The
purpose of a Cost Audit represents the verification of cost accounts and check on the adherence to cost accounting plan. Cost Audit ascertain the accuracy of cost accounting records to ensure that they are in conformity with Cost
Accounting principles, plans, procedures and objective.
Secretarial
Audit
Before enactment of Companies Act, 2013, Secretarial Audit was not
mandatory for the Companies. Section 204 of Companies Act, 2013 has made
Secretarial Audit mandatory for Certain Companies.
In Companies Act, 2013 requirement of Compliance Certificate has
been withdrawn and a new and wider Concept of Secretarial Audit Report has been
inserted in Section 204 of the said
act.
The secretarial Audit is better in the interest of every corporate
management as, an independent professional will certify that the company has
carried out the compliances under the Act
Applicability
Secretarial Audit has
been made mandatory only for bigger Companies. Private Limited Companies has
been kept out of preview of Secretarial Audit, irrespective of their paid-up
capital, turnover and various Laws applicable to private companies.
Section 204 (1) of
the Companies Act 2013 mandates Secretarial Audit for every Listed company and
Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel)
Rules, 2014, mandates Secretarial Audit for every public company having a
paid-up share capital of fifty crore rupees or more; or every public company
having a turnover* of two hundred fifty crore rupees or more.
*“Turnover” means the
aggregate value of the realisation of amount made from the sale, supply or
distribution of goods or on account of services rendered, or both, by the
company during a financial year. [Section 2(91)]
The Secretarial Audit
Report shall be in the Form MR-3 and shall be annex with its Board’s report
made in terms of sub-section (3) of section 134.
Appointment/
Qualifications of Secretarial Auditor
Only a member of the
Institute of Company Secretaries of India holding certificate of practice
(company secretary in practice) can conduct Secretarial Audit and furnish the
Secretarial Audit Report to the company.
As
per section 2 (25) of Companies Act, 2013 “company secretary in practice” means
a company secretary who is deemed to be in practice under sub-section (2) of
section 2 of the Company Secretaries Act, 1980;
As
per Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014,
Secretarial Auditor is required to be appointed by means of resolution passed
at a duly convened Board meeting and resolution for appointment shall be filed
with Registrar of Companies within 30 days of such Appointment in E-form
MGT-14.
Rights and Duties of
Secretarial Auditor
Section 143 of the
Companies Act, 2013 deals with powers and duties of Statutory Auditors.
Sub-section (14) of the section provides that the provisions of this section
shall mutatis mutandis apply to the Company Secretary in Practice conducting
Secretarial Audit under section 204.
Where any of the matters required to be included in the audit
report under section 204 is answered in the negative or with a qualification,
the report shall state the reasons therefor.
Reporting
of Frauds by Secretarial Auditor to Central Government
Section 143,
Sub-section (12) of the Companies Act, 2013 specifies that if an auditor of a
company, which includes Secretarial Auditor [Section 143(15)] in the course of
the performance of his duties as auditor, has reason to believe that an offence
involving fraud is being or has been committed against the company by officers
or employees of the company, he shall immediately but not later than sixty days
of his knowledge report the matter to the Central Government in the form of a
statement as specified in Form ADT-4.
Before reporting the
frauds to central government auditor shall forward his report to the Board or
the Audit Committee, as the case may be, immediately after he comes to
knowledge of the fraud, seeking their reply or observations within forty-five
days;
In case the auditor
fails to get any reply or observations from the Board or the Audit Committee
within the stipulated period of forty-five days, he shall forward his report to
the Central Government alongwith a note containing the details of his report
that was earlier forwarded to the Board or the Audit Committee for which he
failed to receive any reply or observations within the stipulated time.
The report shall be sent to the Secretary, Ministry of Corporate
Affairs in a sealed cover by Registered Post with Acknowledgement Due or by
Speed post followed by an e-mail in confirmation of the same.
The report shall be
on the letter-head of the auditor containing postal address, e-mail address and
contact number and be signed by the auditor with his seal and shall indicate
his Membership Number.
Scope
of Secretarial Audit
In terms of Form
MR-3, Scope of Secretarial Audit has been divided into five heads.
I.
Examine and
report on the compliance of the following five specific laws:
(i)
The Companies Act, 2013 (the Act) and the rules made
thereunder;
(ii) The
Securities Contracts (Regulation) Act, 1956 („SCRA‟) and the rules made
thereunder;
(iii) The
Depositories Act, 1996 and the Regulations and Bye-laws framed thereunder;
(iv) Foreign
Exchange Management Act, 1999 and the rules and regulations made thereunder to
the extent of Foreign Direct Investment, Overseas Direct Investment and
External Commercial Borrowings;
(v) The
following Regulations and Guidelines prescribed under the Securities and
Exchange Board of India Act, 1992 („SEBI Act‟):-
(a) The Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
(b) The Securities and Exchange Board of India
(Prohibition of Insider Trading) Regulations, 1992;
(c) The Securities and Exchange Board of India
(Issue of Capital and Disclosure Requirements) Regulations, 2009;
(d) The Securities and Exchange Board of India
(Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines,
1999;
(e) The Securities and Exchange Board of India
(Issue and Listing of Debt Securities) Regulations, 2008;
(f) The Securities and Exchange Board of India
(Registrars to an Issue and Share Transfer Agents) Regulations, 1993 regarding
the Companies Act and dealing with client;
(g) The Securities and Exchange Board of India
(Delisting of Equity Shares) Regulations, 2009; and
(h) The
Securities and Exchange Board of India (Buyback of Securities) Regulations,
1998;
(vi) Other laws
as may be applicable specifically to the company.
Reporting on
compliance of “Other laws as may be applicable specifically to the company‟
which shall include all the laws which are applicable to specific industry for
example for Banks- all laws applicable to Banking Industry; for insurance
company-all laws applicable to insurance industry; likewise for a company in
petroleum sector- all laws applicable to petroleum industry; similarly for
companies in pharmaceutical sector, cement industry etc.
II.
Secretarial
Standards & Listing Agreements:
(i)
Secretarial Standards issued by The Institute of
Company Secretaries of India and approved by the Central Government.
(ii)
The Listing Agreements entered into by the Company
with Stock Exchange(s), if applicable;
III.
Composition of
Board of Directors/Minutes of Directors & Members Meeting-
The Board of
Directors of the Company is duly constituted with proper balance of Executive
Directors, Non-Executive Directors and Independent Directors.
The changes in the
composition of the Board of Directors that took place during the period under
review were carried out in compliance with the provisions of the Act.
Adequate notice is
given to all directors to schedule the Board Meetings, agenda and detailed
notes on agenda were sent at least seven days in advance, and a system exists
for seeking and obtaining further information and clarifications on the agenda
items before the meeting and for meaningful participation at the meeting.
Majority decision is
carried through while the dissenting members‟ views are captured and recorded
as part of the minutes.
IV.
Adequate systems
and processes in the company -
Secretarial Auditor
also requires to report on whether Adequate systems and processes in the
company commensurate with the size and operations of the company to monitor and
ensure compliance with applicable laws, rules, regulations and guidelines.
V.
Details of specific events / actions having a major bearing on the
company’s affairs-
Secretarial Auditor also requires
to report on details of specific events / actions having a major bearing on the
company’s affairs in pursuance of the laws applicable on the Company during the
audit period the company.
Documents
to be examined/verified while conducting secretarial audit. The points are inclusive
and not exhaustive:
(i)
Books , Papers, as per Section 2 (12) of Companies Act, 2013,“book
and paper” and “book or paper” include books of account, deeds, vouchers,
writings, documents, minutes and registers maintained on paper or in electronic
form.
(ii)
Memorandum of association
(iii)
Articles of association
(iv)
Certificate of Incorporation
(v)
Audited balance sheet(s).
(vi)
Statutory Registers maintained by the Company i.e, Register
of Members/ Register of debenture holder/ Register of Charges/ Register of
Directors and Key Managerial Personnel/ Register of Loans, Guarantee, Security
etc.
(vii)
Details of E-forms filed during the period.
(viii)
Notice of calling Board Meetings.
(ix)
Notice of calling Extra Ordinary General meeting,
Annual General Meeting along with the explanatory statement.
(x)
Minutes of the Board meetings, Extra Ordinary
General meeting, Annual General Meeting, Audit Committee Meetings, Nomination
& Remuneration Committee Meetings, etc.
(xi)
Notices of disclosure of directors’ interests in
Form No. MBP-1 as well as specific notices received from time to time from the
directors and recorded in the minutes of Board meetings.
(xii)
Copy of documents related to the
appointment/Resignation of Statutory Auditor of the company.
(xiii)
Copies of contracts made between the company and any
of the related parties u/s section 188 of Act.
(xiv)
Details of inter-corporate
investments/loans/guarantees/securities etc.
(xv)
Copy of Internal Audit Report given by Internal
Auditor appointed u/s138 of Companies Act, 2013.
(xvi)
For Companies having Foreign Direct Investment
a) Copy of Foreign
Inward Remittance Certificate.
b) Copy of Form
FC-GPR.
c) Copy of Annual
return on Foreign Liabilities & Assets (FLA).
d) Certificates
received from Company Secretary and Chartered Accountant.
e) Copy of
approval Reserve Bank of India/ Foreign Investment Promotion Board.
Penalties
Section
204(4) further provides that, the company, every officer of the company or the company
secretary in practice, contravenes the provisions of Section 204, shall be
punishable with fine which shall not be less than one lakh rupees but which may
extend to five lakh rupees.
In terms of Section 448, a Company Secretary in Practice is liable
to attract penal provision under section 447, if he makes statement in the Secretarial Audit Report which
is false in any material particulars, knowing it to be false; or which omits any material fact, knowing it to
be material.
Section
447 deals with punishment for fraud which provides that any person who is found
to be guilty of fraud, shall be punishable with imprisonment for a term which
shall not be less than six months but which may extend to ten years and shall
also be liable to fine which shall not be less than the amount involved in the
fraud, but which may extend to three times the amount involved in the fraud.
Persuasion/Opinion regarding exclusion of Private Companies from
Secretarial Audit:
Exclusion of private companies, irrespective of their size, from
Secretarial Audit gives a message that the matters covered under such audit
such as compliance with applicable laws is not important. Serious Misdemeanor
has been noticed in many private companies. My view is that Private Companies
having some prescribed Paid-up Capital or Turnover should also be included in
the preview of Secretarial audit.
Disclaimer: Statements and opinions expressed in
articles are those of the author’s personal views. While every care has been
taken in the compilation of this information and every attempt made to present
up-to-date and accurate information, we cannot guarantee that inaccuracies will
not occur. Readers are advised to refer relevant provision of law before
applying or accepting any of the point mentioned above. Author accepts no
responsibility whatsoever and will not be liable for any losses, claims or
damages which may arise because of the contents of this write up
The Author is an Associate Member of the
Institute of Company Secretaries of India.
KUNDAN KUMAR MISHRA
Practicing Company Secretary
New Delhi
Mob: +91-9899208090
cskundanmishra@gmail.com.
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