Secretarial Audit

The Secretarial Audit offers a judgment on whether the firm has suitable systems and
processes in place to monitor and assure compliance with applicable rules, regulations, laws,
and guidelines, consistent with the organization’s size and operations. Secretarial auditing
aids in the detection of non-compliance and the implementation of corrective actions. It
examines the company’s adherence to good corporate practices.

As a result, it is an objective and independent assurance designed to add value to the

Company’s operations. It contributes to the achievement of the organization’s goals by using
a systematic, disciplined approach to evaluating and improving the efficacy of risk
management, control, and governance systems.

Secretarial Audit so gives stakeholders, regulators, and management the essential assurances
about good governance, statutory compliance, and the existence of competent and adequate
systems and processes.

A compliance audit is a secretarial audit. It is an aspect of an organization’s overall

compliance management. It is a useful tool for corporate compliance management, as it aids
in the detection of non-compliance and the implementation of corrective actions. The
government may soon mandate private companies with outstanding debts above a certain
threshold undergo a mandatory secretarial audit. The provisions of Section 204 of Companies
Act, 2013 and Listing Regulations mandates certain companies to conduct the Secretarial
Audit in their Companies.
Mandatory secretarial audit is right now restricted to listed companies, but I think it may have
to get extended to private companies which have outstanding (debts) beyond a threshold.

The objectives of the Secretarial Audit is-

1. To verify & report on compliances of applicable laws and Secretarial Standards;
2. To point out non – compliances and inadequate compliances;
3. To protect the interest of various stakeholders such as the customers, employees,
society etc.
4. To avoid any unwarranted legal actions/ penalties by law enforcing agencies and other
persons as well.

Section 204 of the Companies Act, 2013 says that

A secretarial audit report given by a company secretary in practice in Form MR-3 shall be
annexed with Board’s report made in terms of section 134(3) by:

1. Every listed company and

2. Every public company- having a paid-up share capital of Rs. 50 crore or more;
or having a turnover of Rs. 250 crore or more;
 3. or Every Company having outstanding loans or borrowings from banks or public
financial institutions of Rs. 100 crore or more.

Ascertainment as to whether the Secretarial Audit is applicable on a particular company or

not has to be made by checking below mentioned parameters:
1. Status of a Company – Public or private;
2. Whether the securities of the company have been listed;
3. Whether the company is subsidiary or associate company of a listed company;
4. Turnover of the company.
The term ‘Turnover’ has been defined in section 2(91) and amended under the Companies
(Amendment) Act, 2017 (effective from 09.02.2018 to mean the gross amount of revenue
recognised in the profit and loss account from the sale, supply, or distribution of goods or on
account of services rendered, or both, by a company during a financial year.
Corporate insolvency resolution process (CIRP) can be commenced when a corporate debtor
commits a default – section 4(1) of Insolvency and Bankruptcy Code, 2016 (IBC). The
default should be minimum Rs. one lakh. The amount can be increased by Central
Government but shall not exceed Rs. one crore – proviso to section 4(1).
‘Default’ means non-payment of debt when whole or any part of instalment of the amount of
debt has become due and payable and is not paid by the debtor or the corporate debtor, as the
case may be – section 3(12). Where any corporate debtor commits a default, a financial
creditor, an operational creditor or the corporate debtor itself may initiate corporate
insolvency resolution process in respect of such corporate debtor in the manner as provided
under Chapter II of Part II – section 6.
After commencement of corporate insolvency resolution process under section 7, 9 or 10 of
Insolvency Code, 2016, further action will commence before Adjudicating Authority
(NCLT).
The Adjudicating Authority (NCLT) shall appoint an interim resolution professional within
fourteen days from the insolvency commencement date – section 16(1). His appointment
shall continue till the date of appointment of the resolution professional under section 22 of
Insolvency Code – section 16(5).
“Resolution professional”, for the purposes of Part II of Insolvency Code, 2016 (which
relates to Corporate Persons), means an insolvency professional appointed to conduct the
corporate insolvency resolution process and includes an interim resolution professional
Section 5(27).

Penalty in case of Non-Compliance of Secretarial Audit

Secretarial audit are very important tools for any company to ensure whether they are
complying with all rules and regulations applicable to it as per Companies Act and other
allied Acts. Lot of stakeholders like bankers, shareholders and outside investors reply on
such audit in order to make an informed decision about the company. Therefore, it is very
important that all the officers of the company and company secretary conduct such audit
with due diligence, care and high level of professional expertise.
The companies Act has provided for following type of penalties for non-compliance
relating to secretarial audit.

1. In case of contravention of section 204 of the companies Act, 2013 which deals
with conducting of secretarial audit and furnishing of secretarial audit report along
with board report, every officer of company including company secretary will be
punishable with minimum fine of Rs 1 lac and maximum fine of Rs 5 lac.
2. In case company secretary did not report matter to Central Government relating to
fraud or other offence in the company which has been committed by any officer or
employee of the company, shall be punishable with minimum fine of Rs 1 lac
which may extend upto Rs 25 lac
3. As per provisions of section 448 of the Companies Act, 2013 read with section
447, if any person makes any statement relating to any return, report, certificate,
financial statement, prospectus or other document which is false, knowing that it
is false or omits any material fact knowing same to be material, He shall be liable
for following penalties and punishments:

 Imprisonment of minimum 6 months and maximum 10 years and

 Liable to fine – minimum fine is upto amount involved in fraud and maximum
fine is upto 3 times of amount involved in fraud.
 In case, the fraud involves public interest, the term of imprisonment shall not
be less than three years.

Besides above, in case company secretary in practice is found to be guilty, He shall be

liable for professional and other misconduct per first schedule or second schedule or both
and following actions may be taken against Him

In case professional or other misconduct is as mentioned in first schedule, He shall be

reprimanded and His name would be removed from register of members for 3 months and
subject to maximum fine of Rs 1 lac. In case professional or other misconduct is as
mentioned in second schedule, He shall be reprimanded and His name would be removed
from register of members permanently or such period as may be thought fit by the
Disciplinary Committee; and subject to maximum fine of Rs 5 lac.

Thus, it may be seen from above that legislature has attached lot of importance to proper
conduct of secretarial audit and any contravention or noncompliance of same would result
in penalty including imprisonment not only to officers and directors of the company but
also to company secretary who has conducted such audit.
Appointment of Secretarial Auditor
1. Obtain the consent of secretarial Auditor
2. File a certified true copy of a resolution passed in Board meeting with the registrar
of companies as an attachment in MGT-14
3. Appoint the Secretarial Audit in Board meeting.
4. Fic the remuneration in board meeting.

Filing requirements of Secretarial Audit

A qualification, reservation or adverse remarks, if any, should be stated by the Secretarial
Auditor at the relevant places in his report in bold type or in italics. If the Secretarial Auditor
is unable to express an opinion on any matter, he should mention that he is unable to express
an opinion on that matter and the reasons therefor. If the scope of work required to be
performed is restricted on account of restrictions imposed by the company or on account of
circumstantial limitations (like certain books or papers being in the custody of another person
who is not available or a Government Authority), the Report should indicate such limitations.
If such limitations are so material that the Secretarial Auditor is unable to express any
opinion, the Secretarial Auditor should state that in the absence of necessary information and
records, he is unable to report on compliance(s) relating to such areas by the Company.
Further, the Board of Directors, in its Board’s report, shall explain in full any qualification or
observation or other remarks made by the Company Secretary in Practice in the Secretarial
Audit Report.
Documents required- Secretarial Auditor or the firm of the Secretarial Auditors shall provide
the checklist for carrying out the secretarial audit of the company depending upon the nature
of business activities carried on by the company.
The company gives all assistance and facilities for auditing the secretarial and related records
to the company secretary in practice.

Duty of the board with respect to qualifications.

Secretarial Audit report- Any qualification or observation or other remarks made by company
secretary in practice will be the duty of the board to furnish explanation.

Filing of Financial Statements

The Committee discussed at length the existing provisions of the Act regarding approval and
authentication of accounts, circulation of accounts and filing of accounts with the Regulatory
body.
The Committee was of the view that the concept of appointment of CFO should be
recognized under the Act who should be made responsible for preparation and submission of
financial statements to the Board. The financial statements should also be signed by
Managing Director, CEO, CFO, and the Company Secretary wherever such functionaries are
mandated, whether or not they are present at the Board meeting at which the accounts are
adopted. All the Directors who were present in the meeting which approved the accounts
should also be mandated to sign the accounts.
If a Director dissents, he should also sign the financial statement with the dissent note.
The secretarial audit report shall annex with its Board’s report made in terms of sub-section
(3) of section 134, of the Companies Act, 2013. Ministry of Corporate Affairs, vide its
circular No. 08/2014, dated 4th April 2014, has clarified that Board Report of the Company
relating to financial year that commenced before 1st April 2014, shall be made in accordance
with the relevant provisions of the Companies Act, 1956. As the secretarial audit report is an
annexure to Board’ Report thus the secretarial audit is not mandatory for financial year ended
on 31st March 2014.