Secretarial Audit
Chapter Seventy-Nine
Syllabus topic 4.1, label: "Secretarial Audit"
Pages 594 to 597 of 830
In one line
Every listed company and other prescribed companies must annex to the Board's report a secretarial audit report given by a company secretary in practice; the company must help him audit its records; the Board must explain in full anything he qualifies; and a default costs the company, its officers and the auditor two lakh rupees each.
In exam wording: section 204 is the whole subject, and its marginal note is "Secretarial audit for bigger companies".
Why the law has this at all
A company's accounts are audited every year by a chartered accountant, and that audit answers one question: are the numbers right. It does not answer the other question a member or a regulator wants answered, which is whether the company obeyed the law.
Nobody was checking that. The company secretary reports to the Board on compliance under section 205(1)(a), but he is the company's own officer, and asking him to certify compliance is asking a man to audit his own work.
Section 204 supplies the missing audit and gives it to a company secretary in practice, who is independent of the company, qualified in the law of companies rather than in accounting, and subject to his own professional discipline.
Two features make the audit useful rather than decorative. The company must give him the records, because an auditor who can be starved of papers audits nothing; and the Board must explain in full what he qualifies, so a bad report cannot be buried by annexing it and saying nothing about it.
Some words this chapter uses
A company secretary in practice is defined in section 2(25), being one deemed to be in practice under section 2(2) of the Company Secretaries Act, 1980. A qualification in a report is a statement that the auditor cannot certify something without reservation. The Board's report is the report under section 134(3). Secretarial records are the registers, minutes, returns and filings the Act requires.
Who must have one: section 204(1)
Every listed company and a company belonging to other class of companies as may be prescribed shall annex with its Board's report made in terms of sub-section (3) of section 134, a secretarial audit report, given by a company secretary in practice, in such form as may be prescribed.
Four elements, and an answer should name all four.
Who. Every listed company, and any company in a prescribed class. Note that the marginal note, "secretarial audit for bigger companies", is a description and not a test; the test is listing or the prescribed class.
What. A secretarial audit report in the prescribed form.
By whom. A company secretary in practice, and by nobody else. Not the company's own secretary, and not the statutory auditor.
Secretarial Audit
How it reaches the reader. It is annexed to the Board's report under section 134(3), so it goes to every member with the financial statements and is filed with them.
The company's duty to assist: section 204(2)
It shall be the duty of the company to give all assistance and facilities to the company secretary in practice, for auditing the secretarial and related records of the company.
Two words carry the sub-section. "All" assistance and facilities, and "secretarial and related" records, which is wider than the registers the Act names.
And the duty is on the company, so a refusal by an officer is the company's default, punishable under sub-section (4).
The Board must explain: section 204(3)
The Board of Directors, in their report made in terms of sub-section (3) of section 134, shall explain in full any qualification or observation or other remarks made by the company secretary in practice in his report.
Three things must be explained, and they are listed in ascending order of gravity in reverse: a qualification, an observation, or other remarks. So it is not only a formal qualification that must be answered; a mere observation must be too.
"In full" is the standard. A one-line acknowledgement is not an explanation.
Compare section 134(3)(f), which requires the Board to explain in full every qualification in the statutory auditor's report. The Act treats the two audits alike, and an answer can usefully say so.
The penalty: section 204(4)
If a company, or any officer of the company, or the company secretary in practice contravenes the section, the company, every officer in default and the company secretary in practice in default is liable to a penalty of two lakh rupees.
Note that the auditor is exposed as well. The same penalty attaches to the company secretary in practice who contravenes the section, which is what makes his report worth something.
And note the change. The words were substituted so that the consequence is a penalty, imposed in adjudication, in place of the earlier fine.
A worked example
Chembur Polymers Limited is a listed company.
The audit. It must annex to its Board's report a secretarial audit report in the prescribed form, given by a company secretary in practice: section 204(1). Its own company secretary cannot give it, because he is an officer of the company and section 2(25) requires a person deemed to be in practice.
The records. The auditor asks for the register of members, the register of charges, the minutes of Board and general meetings, the register under section 189, the returns filed with the Registrar and the correspondence with the stock exchange. The company is under a duty to give all assistance and facilities for auditing the secretarial and related records: section 204(2). If the managing director instructs that the section 189 register be withheld, the company is in default, and so is he as an officer in default.
Secretarial Audit
The report. The auditor's report qualifies two matters: that the annual general meeting was called on shorter notice than the Act requires, and that two Board meetings were held with a gap exceeding the permitted interval. He also makes an observation that the register of members was not updated for three months.
What the Board must do. In its report under section 134(3), the Board must explain in full the two qualifications and the observation: section 204(3). It may not annex the report and say nothing, and it may not answer only the qualifications and ignore the observation, because the sub-section covers any qualification or observation or other remarks.
A default. Suppose the company simply does not obtain a secretarial audit report at all. The company, every officer in default and, if he is in default, the company secretary in practice are each liable to a penalty of two lakh rupees: section 204(4).
And what the audit does not do. Section 205(2) provides that sections 204 and 205 shall not affect the duties and functions of the Board, the chairperson, the managing director or a whole-time director. So the directors cannot answer a charge of non-compliance by pointing to a clean secretarial audit report.
Distinctions that carry marks
| Statutory audit, section 143 | Secretarial audit, section 204 | |
|---|---|---|
| Who conducts it | The company's auditor, a chartered accountant | A company secretary in practice |
| What it examines | The accounts and financial statements | The secretarial and related records and compliance with law |
| Who must have it | Every company | Every listed company and prescribed classes |
| Where the report goes | To the members, under section 143 | Annexed to the Board's report under section 134(3) |
| Board's duty on a qualification | Explain in full, section 134(3)(f) | Explain in full, section 204(3) |
| Company secretary, section 2(24) | Company secretary in practice, section 2(25) | |
|---|---|---|
| Position | An officer of the company, and key managerial personnel | Independent of the company |
| Function under this chapter | Reports to the Board on compliance, section 205(1)(a) | Gives the secretarial audit report, section 204(1) |
What this does NOT mean
It does not mean every company needs a secretarial audit. Only every listed company and companies in a prescribed class.
It does not mean the company's own secretary may give the report. It must be a company secretary in practice within section 2(25).
Secretarial Audit
It does not mean annexing the report discharges the Board. The Board must explain in full any qualification, observation or other remarks.
It does not mean only the company is liable. The company, every officer in default and the company secretary in practice each face a penalty of two lakh rupees.
It does not mean a clean report protects the directors. Section 205(2) preserves the duties of the Board, the chairperson, the managing director and any whole-time director.
Quick revision
- 204(1): every listed company and prescribed classes shall annex to the Board's report under section 134(3) a secretarial audit report in the prescribed form, given by a company secretary in practice.
- 204(2): the company must give all assistance and facilities to him for auditing its secretarial and related records.
- 204(3): the Board shall explain in full any qualification, observation or other remarks made in that report.
- 204(4): contravention makes the company, every officer in default and the company secretary in practice in default liable to a penalty of two lakh rupees.
- Related: the auditor is a company secretary in practice under section 2(25), not the company's own secretary under section 2(24); and section 205(2) preserves the duties of the Board, chairperson, managing director and whole-time director.
Test yourself
1. Which companies must obtain a secretarial audit report, and from whom? Every listed company and every company belonging to such other class as may be prescribed, from a company secretary in practice, in the prescribed form, the report being annexed to the Board's report made under section 134(3): section 204(1).
2. What duty does the company owe the auditor? To give all assistance and facilities to the company secretary in practice for auditing the secretarial and related records of the company: section 204(2).
3. What must the Board do about a qualification in the report? Explain it in full in its report under section 134(3), and the duty extends to any qualification or observation or other remarks made by the company secretary in practice: section 204(3).
4. Who is liable for a contravention, and how much? The company, every officer of the company in default, and the company secretary in practice in default, each liable to a penalty of two lakh rupees: section 204(4).
5. Can the company's own company secretary conduct the secretarial audit? No. The report must be given by a company secretary in practice, that is one deemed to be in practice under section 2(2) of the Company Secretaries Act, 1980: section 2(25). The company's own secretary is its officer and its key managerial personnel.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.