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Documents Required

• Company Information

1. Certificate of Incorporation

2. Memorandum of Association (MOA) and Articles of Association (AOA)

3. Board and General Meeting Minutes

4. Register of Members, Debenture Holder and Directors

5. Share Certificates

6. Share Allotment and Transfer Records

• Financial Records

1. Financial Statements

2. Auditor’s Report

3. Tax Returns

• Compliance Records

1. Regulatory Filings

2. Compliance Certificates

3. Internal Audit Reports

4. Corporate Social Responsibility (CSR) Reports

• Other Documents

1. Contracts and Agreements

2. Employee Records

3. Intellectual Property Records

4. Records of Foreign Investments

Introduction

A specific type of audit called a secretarial audit examines whether a business is adhering to the legal and regulatory obligations concerning corporate governance. In order to verify compliance with the terms of the Companies Act, 2013, as well as other pertinent regulations, a methodical review of the company's records, processes, and practices is conducted.

Secretarial audits examine the company's corporate governance procedures in contrast to financial audits, which focus mostly on evaluating the accuracy of financial accounts. This helps to ensure that the business is operating legally and in accordance with sound corporate governance standards.

Scope of Secretarial Audit

Typically, a secretarial audit's purview consists of:

1. Corporate Governance: Evaluating the board of directors, committees, and internal controls as part of the organization's corporate governance structure.

2. Company Secretarial Practices: Examining the secretarial procedures of the business, including the upkeep of records, the filing of returns, and adherence to legal obligations.

3. Shareholder Relation: Examining the company's procedures for handling shareholder interactions, such as holding general meetings and sending out notices.

4. Related Party Transactions: Evaluating whether the business's related party transactions adhere to all relevant legal and regulatory requirements.

5. Corporate Social Responsibility (CSR): Examining the business's CSR initiatives and ensuring that CSR reporting regulations are being followed.

6. Compliance with Laws: Ensuring that the business complies with all relevant corporate laws, rules, and regulations, including the Companies Act of 2013, SEBI regulations, and other relevant statutes

7. Risk management: The process of determining and evaluating possible threats to the business's operations while also making sure that the right safeguards are in place.

8. Internal Controls: Assessing how well the organization's internal controls are in place to thwart fraud, mistakes, and inefficiencies.

9. Financial Reporting: Examining the organization's financial reporting procedures to make sure they meet legal and accounting requirements.

Which Companies can apply for a Secretarial Audit?

The following are some of the main types of businesses that usually undergo secretarial audits:

1. Public companies: Secretarial audits are mandatory for all public enterprises, regardless of size.

2. Private companies with at least ₹5 crore in paid-up share capital: Secretarial audits are mandatory for private enterprises that have a paid-up share capital of ₹5 crore or higher.

3. Private companies that operate as divisions of public businesses: Secretarial audits are performed on private enterprises that are public company subsidiaries.

4. Companies that carry out certain tasks: Secretarial audit requirements may differ for businesses involved in particular industries, such as banking, insurance, or non-banking financial corporations (NBFCs).

5. Companies that are listed on stock markets: Secretarial audits are typically a requirement for companies registered on stock exchanges as part of their compliance duties.

Apart from the aforementioned statutory requirements, certain organizations may elect to carry out voluntary secretarial audits in order to verify adherence to optimal standards in risk management and corporate governance.

Step By Step Procedure for Secretarial Audit

1. Planning and Engagement

• Initial Meeting: To discuss the objectives, schedule, and deliverables of the audit, the secretarial auditor meets with the management of the company.

• Engagement Letter: Both parties sign a formal engagement letter that outlines the parameters of the audit.

2. Understanding the Company

• Examining Documentation: The auditor goes over the company's financial statements, byelaws, meeting minutes, and constitution among other pertinent documents.

• Evaluate Corporate Governance: The auditor evaluates the company's internal controls, committees, and board of directors as well as its corporate governance structure.

3. Testing and Verification

• Records Testing: The auditor verifies the accuracy and completeness of a variety of records, including share registers, meeting minutes,  statements.

• Compliance Verification: The auditor confirms that the business complies with all relevant laws and rules, such as the Companies Act of 2013, SEBI regulations, and other applicable statutes.

4. Assessment of Corporate Governance Methods

• Evaluation of Board Effectiveness: The auditor assesses how well the board of directors manages the business operations of the organization.

• Review of Committee Functions: The auditor examines how different committees, including the audit and compensation committees, are operating.

• Assessment of Internal Controls: The auditor evaluates the effectiveness and sufficiency of the internal controls in place at the business.

5. Determining Problems and Suggestions

• Issue Identification: The auditor notes any alterations to the law or industry standards for corporate governance.

• Suggestions: To resolve issues found and enhance the business's corporate governance procedures, the auditor makes suggestions.

6. Preliminary and Final Report

• Draft Report: The auditor compiles a preliminary report that includes a summary of the conclusions, suggestions, and findings.

• Final Report: After making any required adjustments, the management of the company receives the final report.

7. Confirmation and Monitoring

• Follow-Up: To make sure the business is adopting corrective measures, the auditor may do a follow-up on how the recommendations are being implemented.

• Assurance: With regard to the sufficiency of the company's corporate governance procedures, the auditor reassures the parties involved.

Post Compliance Procedure

Following the conclusion of a secretarial audit, organizations must adhere to certain post-compliance protocols. These protocols guarantee continuous adherence to legal and regulatory obligations and resolve any problems found throughout the audit.

The following are some essential post-compliance steps:

1. Implementation of Recommendation: To resolve any identified shortcomings or non-compliance issues, the business should put the secretarial auditor's advice into practice. This could entail altering behaviors, policies, or procedures.

2. Continuous Observation: The business needs to set up a system for continuously observing if legal and regulatory obligations are being followed. This could involve compliance evaluations, internal audits, and routine examinations of pertinent laws and regulations.

3. Maintaining Accurate and Current Records: The business must keep accurate records of all compliance-related operations, such as audit reports, remedial measures, and monitoring outcomes.

4. Reporting: Regulatory bodies or other stakeholders may compel the business to provide updates on its compliance status. This could entail delivering compliance certificates, filing yearly returns, or revealing compliance data in financial reports.

5. Training and Awareness: The business must make sure that staff members are informed of their responsibilities and get training on pertinent compliance standards. This may aid in averting non-compliance problems in the future.

6. Constant Improvement: The business should make a constant effort to enhance its compliance procedures. This could entail adopting best practices, putting new procedures into place, or getting outside counsel.

Penalties Incurred for not following the Procedure

The Companies Act of 2013 and other pertinent laws may impose fines and penalties for noncompliance with the secretarial audit processes. These sanctions could consist of:

1. Fines: Based on the type and extent of the non-compliance, the business and its officers may be required to pay fines of different sums.

2. Disqualification: For a predetermined amount of time, company officers who are in charge of the non-compliance may not be allowed to hold positions in any other company.

3. Criminal Prosecution: Failing to comply with secretarial audit obligations may occasionally be considered a criminal violation, subject to legal action and even jail time.

4. Regulatory Action: The firm or its officers may be subject to penalties, limitations, or delisting from stock exchanges by the Securities and Exchange Board of India (SEBI) or other regulatory organizations.

5. Reputational Damage: Failure to follow secretarial audit protocols can harm a company's standing with investors, make it more difficult to raise money, and have other negative effects.

Challenges faced during Secretarial Audit

For many reasons, secretarial audits can be difficult. During these audits, the following issues are frequently encountered:

1. Complicated Regulatory Environment:

• Various Laws: Businesses frequently have to abide by a complicated network of laws and rules, such as the Companies Act of 2013, SEBI regulations, and industry-specific guidelines.

• Regular Amendments: Businesses find it challenging to stay up to date with the most recent requirements due to the frequent amendments made to laws and regulations.

2. Lack of Industry Standardized Practices

• Industry specific requirements: It might be difficult to create uniform audit procedures since different industries may have different corporate governance policies and reporting requirements.

• Evolutionary Nature of Corporate Governance: It is challenging to establish a set of standards since corporate governance procedures are continuously changing.

3. Limited Information Access

• Faulty or Incomplete Records: Organizations may maintain faulty or incomplete records, which makes it challenging for auditors to obtain the information they need.

• Information Reluctance: The audit process may be hampered by certain organizations' reluctance to provide auditors with sensitive information.

4. Time Restraints

• Strict Deadlines: Secretarial audits frequently have strict deadlines that must be met, which can impose pressure on the auditor and the business.

• Limited Resources: Organizations may not have as much money to devote to the audit process as they would like, which could affect the audit's breadth and quality.

5. Technological Difficulties

• Problems with Data Management: It can be difficult to manage massive amounts of data and guarantee its correctness, particularly for businesses with intricate IT infrastructures.

• Data privacy issues: It's important, but often difficult, to safeguard sensitive data while conducting an audit.

6. Changing Business Environment

• Acquisitions and Mergers: A company's reporting requirements and corporate governance structure may be strongly impacted by acquisitions and mergers.

• Economic Fluctuations: Companies may have difficulties with resource allocation  during periods of fast expansion or decline.

Interesting Facts

ICAI vs Peerless General Finance & Investment Co. Ltd.

The issue concerned the company's auditors' purported carelessness in failing to spot and disclose discrepancies in the financial accounts. The ICAI argued that the auditors' failure to use reasonable care and attention in their review of the company's financial statements was a contributing factor in the investors' financial losses. In its ruling, the court decided that the auditors were accountable for the losses suffered by the investors since they had violated their duty of care. The case established a precedent for holding auditors accountable for their negligence and highlighted the significance of professional standards and due diligence in auditing operations.

Vineet Nayyar v. Union of India

This case addressed the idea of corporate social responsibility, or CSR, and businesses' duties to uphold their social obligations. The government's CSR policy was contested by petitioner Vineet Nayyar, who contended that businesses shouldn't be required to devote a specific portion of their earnings to CSR endeavors. In its ruling, the court recognized the value of corporate social responsibility (CSR) in advancing social welfare and sustainable development and maintained the government's policy. The court stressed that businesses have a social responsibility to support society in addition to their exclusively profit-driven goals.

ICAI v. Satyam Computer Services Ltd.
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The case was a significant accounting scam that came to light in 2009. The management of Satyam was found to have fabricated claims of having cash deposits in fictitious bank accounts in order to inflate the company's financial results. PricewaterhouseCoopers (PwC), the company's auditors, were charged with negligence for neglecting to identify and disclose the fraud. PwC was sued by the ICAI, which claimed that the company's audit practices were deficient and that they had neglected to take reasonable care and diligence. In its ruling, the court penalized PwC and found them accountable for their part in the scam.