secretarial audit - statutory provisions & icsi views cs makarand lele central council member of...
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Secretarial Audit - Statutory Provisions &
ICSI viewsCS Makarand Lele
Central Council Member of ICSIPartner – MRM Associates, Company Secretaries, Pune
Rationale • Ensuring procedural compliance by the Companies initially for
listed and big companies• Under all statutes and not just Company Law• Specifically Statutory Disclosures & adherence to secretarial
standards • Safety net for investors (both individual & institutional) from legal
repercussions• Provides comfort to government, regulators, Board about good
conduct of affairs of the Company• Should form a part of annual financial disclosures to the
stakeholders
Legal Provisions
Legal Provisions•Section 204 of the Companies Act, 2013•Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 •Enforced with effect from 01.04.14 •Applicable for all financial years commencing on or after 01.04.14
Secretarial Audit- Applicability
• Applicable to all listed companies & following class of companies:• every public company having a paid-up share capital of Rs. 50 Crores or
more; or • every public company having a turnover of Rs. 250 Crores or more.
• The point at which any of the criteria is crossed, SA is applicable. • Appointment of PCS to be made by way of passing a Board
resolution. [Rule 8 of the Companies (Meetings of Board and its Powers) Rules, 2014]• Submission of Form MGT 14 is mandatory.• Appointment period can be decided by the Board – act is silent
Who is Eligible to Conduct? •Practicing Company Secretary holding a valid Certificate of Practice issued by ICSI:• as on the date of appointment (Co has to ensure
eligibility of PCS) • as on the date of signing of the report (PCS has to
ensure)
Limits for audit by ICSI• ICSI on 6th April, 2015 has issued guidelines for issuing
secretarial audit report, signing and certification of annual return introducing maximum number of secretarial audits a PCS can undertake in one financial year.• Effective from financial year 2015-16.• For a firm of Company Secretaries, the ceiling in
respect of Secretarial Audit would apply to each partner.
Limits for audit by ICSINo. of years as member of ICSI as on 1st April of each Financial Year
Number of Secretarial Audit Reports
Upto & equal to 5 years 5More than 5 years but less than or equal to 10 years
10
More than 10 years 20
• In future eligibility for listed companies would be linked with “peer review” of practicing units.
• Institute has activated a dedicated email id for receiving Secretarial audit comments/ suggestions/ queries [email protected]
• FAQ’s on Secretarial Audit are available on ICSI website
Indicative statistics of number of companies covered for SA
Listed Companies 6000
Unlisted Public Companies falling within the criteria
3000
Total (approx.) 9000
Total number of PCS 6754
Suggested Process of Secretarial Audit
• Guidance Note on Secretarial Audit issued by ICSI suggests the following procedure:• Appointment of Secretarial Auditor to be done in Board
Meeting• Communication to earlier incumbent, if any• PCS to accept appointment by accepting Letter of
Appointment• Preliminary discussions & survey by PCS with help of
company personnel• Preliminary meeting with senior management personnel
and deciding time frame with reference to scope & objectives
• Preparing & finalizing the Audit Plan indicating the responsibilities of staff & finalizing the detailed check lists• Testing, interviews of company personnel, review of
procedure manuals, processes, testing & analysis•Maintaining Comprehensive working papers for forming
the expression of opinion• Audit summary to be discussed with the management• Submission of Secretarial Audit Report to the Board
General Principals & Guidelines• Identify Correct segment of the Company • Identify applicable other laws • Define proper scope of Auditing – coverage of laws • Select proper samples for examination• Use materiality test to select representative data• Not expected to do 100% checking • Identify High Risk Areas & undertake extensive scrutiny for it• Study the compliance management system and presence of CS and decide
scope & extent of Auditing • Obtain Management Representation Letter wherever examination is not
possible• Ensure Auditing of Compliance Management System – checks and balances,
authorities, internal controls
General Principals & Guidelines contd.
• Study Internal Compliance certification mechanism • Verify submission and filing made to various regulators from Public
Domain• Meet RTA & other agents • Meet consulting PCS • Decide the extent of reliance on third party certification• Educate you associates and assistants • Keep proper backup papers • Exercise all possible care, reasonable skills & due diligence• Charge fees commensurate with the size of assignment • Adhere to Directives and Guidance issued by ICSI from time to time
Format & related provisions
•Secretarial Audit report shall be prepared in Form No. MR-3. [Rule 9 (2) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014]
•The qualifications/ observations/ remarks made in the Secretarial Audit report are to be explained in full by the Board in its report. [S. 204 (3)]
Important Points in the Reporting format
Form MR–3 : Important Concepts• Secretarial Audit report is addressed to the
Shareholder• Secretarial Audit is audit of • compliance of statutory provisions • adherence to good practices – what are the benchmarks?
•Comment on reasonableness of basis adopted for evaluation of corporate conducts/ statutory compliance• Secretarial Auditor to express his opinion
Form MR–3 : Important Concepts• Suggested Tools of verification & obtaining information • Books & Papers• Minute books• Forms and returns• Statutory & other records• Information provided by Company, officers, agents & authorized
representatives
• Reporting• Opinion based • Complied with statutory provisions for laws listed in the report • Company has proper board processes• Compliance mechanism in place
Examination of Statutory Compliance of Laws
• The Companies Act, 2013 (the Act) and the rules made thereunder;• The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the
rules made thereunder;• The Depositories Act, 1996 and the Regulations and Bye-laws
framed thereunder;• Foreign Exchange Management Act, 1999 and the rules &
regulations made thereunder to the extent of Foreign Direct Investment, Overseas Direct Investment & External Commercial Borrowings;• SEBI Regulations & Guidelines as specified in the format
Compliances of Specified SEBI Regulations• (a) Substantial Acquisition of Shares and Takeovers Regulations, 2011;• (b) Prohibition of Insider Trading Regulations, 1992;• (c) Issue of Capital and Disclosure Requirements Regulations, 2009;• (d) Employee Stock Option Scheme and Employee Stock Purchase
Scheme Guidelines, 1999;• (e) Issue and Listing of Debt Securities Regulations, 2008;• (f) Registrars to an Issue and Share Transfer Agents Regulations, 1993
regarding the Companies Act and dealing with client;• (g) Delisting of Equity Shares Regulations, 2009; and• (h) Buyback of Securities Regulations, 1998;
Other Laws•Other laws as may be applicable specifically to the company
• Segment wise Examination is expected• Identify Industry Segments • Identify Specifically applicable laws/ rules/ regulations• ICSI so far provided 17 industry specific laws list • Nature of other laws could be • Central Laws – Banking, Insurance, NBFC, Food, Drugs, IT, petroleum• State Laws • Local laws
• Focus on compliance aspect of other laws
ICSI View on Scope of AuditICSI vide its communication dated 22.12.2014 to the members specified the methodology to be adopted by Auditor in respect of examination of compliances of various laws:
• Compliances of Specified 5 laws, regulations & guidelines in MR-3 to be examined in detail. (Detailed Audit)
• Compliances of Other laws i.e. laws which are applicable to specific industry to be examined in detail (Detailed Audit)
• Compliances of General Laws to be examined by verifying the existence & adequacy of systems & processes to monitor& ensure compliance (System Audit)
• Compliances of financial laws like tax, customs etc. to be examined by relying upon the reports given by statutory auditors or other designated professionals. (based auditing)
Compliance under clauses of SS & Listing Agreement
•Examination of compliance with applicable clauses of:• Secretarial Standards issued by The Institute of
Company Secretaries of India ( not notified yet)
•The Listing Agreements entered into by the Company with Stock Exchange(s).
Further Reporting On Board constitution & meetings
• Board is duly constituted• Board has proper balance - Exe, Non- exe, Independent• Changes in the Board are made after observing compliances with
the provisions of the Act.• Adequate notice of Meetings, agenda & detailed notes were given
atleast 7 days in advance to all the directors • Existence of system for seeking & obtaining further information,
clarifications by the Directors from the Company for meaningful participation• Dissenting Votes were captured & recorded in Minutes
Further reporting on Compliance Mechanism
•Adequate System & Process commensurate with its size & operations is in existence • to monitor & ensure compliances with applicable
Laws, Rules, Regulations and Guidelines
It seems that auditor is expected to check the mechanism & process for ensuring & monitoring compliances of entire applicable laws.
Reporting of Specific Events/ Actions having bearing on Co’s affairs
• Inclusive List provided• Following Examples given• Public/Right/Preferential issue of shares / debentures/sweat equity, etc.• Redemption / buy-back of securities• Major decisions taken by the members in pursuance to section 180 of
the Companies Act, 2013• Merger/ amalgamation / reconstruction, etc.• Foreign technical collaborations
• Auditor is expected to analyze which actions & events had major bearings on company’s affairs.
Reporting of Observations & finding • Auditor to report para wise specific:• Observations• Qualifications• Reservation• Adverse Remarks
• In respect of applicable laws & Board structure, system & processes for compliances management • Auditor may provide details of Audit Findings as annexure to the Report
ICSI suggested to state qualifications and observations in Bold type or in Italics.
Reporting of Observations & finding contd..
•Auditor may also report his inability to express opinion on any particular matter with reasoning•Auditor may also report his limitations on account of
restrictive scope of Audit provided by the Co•Non availability of material information limiting
expression of opinion by auditor to be reported • This may be non availability of records at Company or
under judicial or other custody.
Post Auditing Compliances• Signing of Secretarial Audit Report: On or Before the date of
signing of Board’s report.• Placing: Secretarial Audit report is to be placed before the
Board meeting convened for approval of Board’s report. This will facilitate Board to offer their comments on Audit observations and qualifications if any • Circulation- Secretarial Audit Report is required to be annexed
to Board’s report and will be circulated to all stakeholders and auditors.• Filing- The same will be filed as a part of attachments to Form
AOC-4 (Form for filing financial statements)
Powers & duties of Company Secretary
PowersEnormous responsibility commensurate with powers• Secretarial Auditor enjoys a wide gamut of powers by virtue of
Section 204 (2) and Section 143 (14)• right of access to the books of account & vouchers• to require from the officers of the company such information &
explanation as may be necessary for performance of his duties as auditor• power to enquire, inter alia, into the following matters:
• Security for loans and advances made by the company and its terms • Transactions represented merely by book entries with respect to interest of the
company • Sale of assets of the company as consist of shares, debentures and other
securities • Treatment of loans and advances made by the company • Treatment given to personal expenses;• Details of share allotted for cash
Duties• Section 204 (2):Duty of the Company to give all assistance & facilities
to Secretarial Auditor for auditing the secretarial & related records• Section 205: Functions of CS – cased vast duties to ensure
compliances • Following are the duties of Secretarial Auditor:• Duty to report fraud [S. 143 (12 & 14)]• Other duties emerging from the Reporting format :
• Duty to scrutinize and verify the records• Duty to examine compliances of all applicable laws• Duty to verify & ensure systems & processes for compliances• Duty to report the non-compliances/ irregularities
• Above all, duty to adhere to the highest professional standards & justify the confidence reposed in the profession
Keep close watch on ICSI Professional Misconduct Provisions
• Fails to communicate to earlier PCS• Paying share in fees or brokerage or profits to others• Discloses information acquired during the course of professional
engagement• Fails to discloses material facts known to him in his report or statement• Fails to report material mis-statement known to him in professional
capacity • Does not exercise due diligence or is grossly negligent in the conduct of
professional duties• Fails to invite attention to any material departure from generally accepted
procedures relating to secretarial practice• Contravenes any of the CS Act, Rules or Council Guidelines
Reporting of Fraud
FraudS 447: “Fraud” in relation to affairs of a company or any body corporate, includes • any act, omission, concealment of any fact, abuse of position
committed by any person or any other person with the connivance in any manner, • with intent to deceive • to gain undue advantage from • or to injure the interests of, the company or its shareholders or its creditors or
any other person
• whether or not there is any wrongful gain or wrongful loss;• (ii) “wrongful gain” means the gain by unlawful means of property to which the
person gaining is not legally entitled;• (iii) “wrongful loss” means the loss by unlawful means of property to which the
person losing is legally entitled.
Reporting of fraud• Duty is casted upon the Secretarial Auditor to report fraud where
during the course of his audit he has reason to believe that an offence involving fraud is being committed or has been committed against the Company by its officers/ employees. [S. 143 (12 & 14)].• ICAI has issued guidance note on reporting of frauds. Suggesting
members to adopt professional approach in examination of fraud and precautionary measures taken by the Company to prevent frauds. • The manner of reporting is prescribed under Rule 13 of the
Companies (Audit and Auditors) Rules, 2014.• Report of fraud to be forwarded to Board/ Audit Committee immediately
after knowledge of fraud, seeking their reply or observations within 45 days
Reporting of fraud contd…
• On receipt of reply/ observations, the auditor shall forward his report & reply/ observations received along with his comments on the same to Central Government within 15 days of receipt of such reply/ observations. • In case where no reply/ observations are received within 45 days, the
report is to be sent to Central Government in Form ADT-4 along with note containing the details of his report sent to Board/ Audit Committee for which no reply/ observations were received. • The report shall be sent to the Secretary, MCA by Registered Post with
AD or by Speed post followed by an e-mail in confirmation. • Reporting for fraud is applicable from current 14-15. • MCA is likely to prescribe materiality concept for fraud reporting.
How to cope with the challenges?
• The multifarious roles & ominous responsibilities mandate that the Secretarial Auditor cannot be a ‘Lone Ranger’.• It has to be team effort where experts across the covered fields
are collaborating & proper co-ordination between them is to be ensured.• Also, audit pre-supposes only ‘reasonable basis’ for ensuring the
compliances. Hence, in all other matters, certifications/ comfort letters from the concerned officers of the Company and its Company Secretary may be taken and relied upon.• Adherence to good corporate practices may be determined after
having reference to non-binding provisions of listing agreement, general practices in the industry etc.
Penalties
• Co, its officer & PCS who is in default of Section 204 is liable for fine of Rs. 1 Lac to Rs. 5 Lacs.
• PCS who has failed to comply with the provisions of Section 143 is liable for a fine of Rs. 1 Lac to Rs. 25 Lacs.
• CS in employment or PCS may be liable for disciplinary action for professional misconduct under provisions of Company Secretaries Act, 1980.
• (Section 448) For any false statement/ material omission Person is liable under Section 447 for a punishment i.e. • imprisonment of 6 months to 10 years and; •fine of amount not less than the amount involved in
the fraud which may extend to 3 times the said amount.
• (Section 451) Punishment for repeated default – twice the amount of fine plus imprisonment
• Proposed Secretarial Standard 1 on Board meetings recommends the Board to note in its meeting, Acts Specifically Applicable to the Company. – will be a major guiding force to Secretarial Auditor. • MCA look forward to SA as comprehensive document to understand the
compliance level.• Audit Fees can be disclosed in Financial Statement• Appointment/ removal/ vacancy to be in line with statutory auditor provisions• Return of appointment to be filed with MCA• Roll check provision to be made at MCA to control on numbers• Maker Checker concept to be adopted • Development of Industry specific Guidance Notes for Auditing • Capacity building & training sessions for the members. • ICSI curriculum to be modified to develop other laws acumen among
members.
Seek excellence&
Success will follow
