Secretarial Audit – Audit Principles and Techniques | CS Professional

CS Professional Programme – SACMDD

Secretarial Audit – Audit Principles and Techniques

A Secretarial Audit is a systematic process of inspection of the secretarial compliances and records of the Company. Unlike the other audits like statutory or internal audit, the secretarial audit also has certain principles and techniques that act instrumental in unraveling the compliance of the company with respect to the applicable laws, rules, and regulations. Before going into the subjective content, let us have a quick look into the basic principles that govern any Audit which also mutatis mutandis apply to Secretarial Audit as well.

 

Basic Principles of an Audit

 

1. Integrity & Independence and Objectivity

 

The secretarial auditor has to be honest while auditing and cannot be favoring the company. Apparently, another vital principle is independence. The auditor shall not have any interest in the company, which allows arriving at an independent opinion.

 

2. Non-Disclosure of Confidential Information

 

In the course of the Auditor, the auditor shall have access to a lot of sensitive financial information, business plan or strategy etc. For instance, during an inspection of Board Minutes, competitor analysis and strategy could be discussed. It is important that such confidential information and documents are dealt with due respect and should not be disclosed to any third party unless it is a requirement by law.

 

3. Professional Qualification & Competency

 

The secretarial auditor is expected to possess adequate experience in the procedures of auditing and importantly to be a qualified company secretary in practice. Moreover, the updated knowledge on the recent changes, announcements, rules, notifications, etc also determines the competency of the auditor.

 

4. Audit Plan and Documentation

 

An audit plan allows the secretarial auditor to plan out the scope of work and enables him to be more efficient and timely. Subsequent to audit, the secretarial auditor shall collect adequate documentation to support his final opinion. This documentation acts as the evidence of audit and the basis of the opinion.

 

5. Audit Conclusions and Reporting

 

At the conclusion of the audit, the secretarial audit may call for further clarification for the officers and management of the company, if required. Post to which the auditor shall form his opinion in form of a secretarial audit report based on all relevant secretarial standards, records of the company is in compliance with all regulations and statutory requirements and all other material information that has been disclosed to the auditor by the company.

 

PRINCIPLES & TECHNIQUES

 

As we speak of principles, under secretarial audit the Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI). These Secretarial Standards are the policy documents that act as guidelines to educate the company and professionals on various aspects of secretarial practices in the corporate sector. These Standards lay down a set of principles that companies are expected to adopt and adhere to, in their ordinary course of business.

 

The main understanding that should be infested is that the Secretarial Standards do not seek to substitute any existing laws or the rules and regulations framed thereunder but, in fact, seek to supplement such laws, rules, and regulations. Secretarial Standards that are issued will be in conformity with the provisions of the applicable laws. However, in case of any inconsistency arising out of the interpretation, the law shall prevail over the standards.

 

Further, the Techniques refers to the audit process, and the method of ascertaining the compliance status has been briefly discussed in the earlier Article on Audit Process and Documentation. Thus not going to reproduce the same in here.

 

Now coming back to the principles, ICSI has issued 10 Secretarial Standards. All these standards lay down principles that are supplementary to the provisions laid under the Companies Act, 2013, and rules made there under. Let broadly discuss significant requirements laid under the standards, and for the complete and exhaustive requirements could be referred to the respective Secretarial Standards.

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(SS-1) Secretarial Standard on Meetings of the Board of Directors

 

The Secretarial Standard deals with principles in relation to convening and conduct of meetings of the Board of Directors and committees including the frequency of meetings, quorum, attendance, resolutions, recording, and preservation of minutes, etc. This Standard provides for the following, amongst others:

 

1. Notice of Board Meeting should be served at least 15 days prior notice irrespective of pre-determined dates if any and agenda should be sent at least 7 days prior to the meeting date.

 

2. Notice should be given to all Directors, whether in India or abroad in the prescribed mode. Where a director specifies a particular mode, the Notice served in that mode.

 

3. Notice is essential to avoid any item of significance being considered and approved without the prior knowledge of Directors.

 

4. The quorum should be present at every stage of the Meeting. Any business transacted by a number lesser than the quorum is considered void.

 

5. To ascertain the ‘will of the majority’, resolutions to be passed by circulation should be sent to all Directors. Recognizing its importance, the Standard crystalises the date on which a Resolution sent for passing by circulation shall be deemed to have been passed. Further to ensure authenticity, the standard provides that the Resolutions passed by circulation should be placed before the next Meeting of the Board for noting and should be reproduced as part of the minutes of that meeting.

 

6. Annual, quarterly or half-yearly financial results and Limited Review Report should be approved at a meeting of the Board or its Committee and should not be approved by means of a Resolution passed by circulation.

 

7. the draft Minutes thereof should be circulated to all the Directors for their comments, within seven days from the date of the meeting of the Board. Similarly, the Minutes of meetings of any Committee should be circulated to the Board along with the Agenda for the next meeting and should be noted by the Board.

 

8. Apart from the Resolution or decision, the Minutes should mention the brief background of the proposal and the rationale for passing the Resolution or taking the decision.

9. Minutes of all meetings should be preserved permanently.

 

(SS-2) Secretarial Standard on General Meetings

 

The Secretarial Standard on General Meetings prescribes a set of principles which companies are expected to observe in the convening and conducting of General Meetings and matters related thereto.  The salient features of this Standard which supplement the Company Law and on which the Companies Act are:

 

1. Notice of every General Meeting should be given to every member at the address provided by him whether in India or outside India and Notice should also be placed on the website of the company if any. If the venue of the meeting is not a prominent place, a site map of the venue should be enclosed with the Notice. The notice should also be given to the Directors and other specified recipients such as banks and financial institutions and other interested parties.

 

2. In the case of listed companies, the Notice, listing the items of business and the day, date, time, and venue of the Meeting, should be hosted on the website of the company.

 

3. All Directors of the company should attend all meetings of shareholders and be available to reply to shareholders’ queries. If any Director is unable to attend the Meeting for reasons beyond his control, the Chairman should explain such absence at the Meeting.

 

4. Framing of Resolutions and explanatory statement in simple language in the Notice is emphasized for the benefit of members.

 

5. The Practicing Company Secretary who has been giving the compliance certificate should attend every Annual General Meeting. The Standard also makes it obligatory for the auditors of the company to attend the Annual General Meeting if there are any reservations, qualifications or adverse remarks in the Auditor’s Report.

 

6. Chairman should explain the objective and implication of each resolution before the resolution is put to vote.

 

7. The Standard deals in depth with the concept of voting by-poll. In the case of listed companies with over 5,000 Members, the result of the poll should be published in a leading newspaper circulating in the neighbourhood of the registered office of the company.

 

8. Resolutions specified in the Notice for items of business which are likely to affect the market price of the securities of the company should not be withdrawn.

 

9. No gifts, gift coupons, or cash in lieu of gifts should be distributed before, at, or in connection with the General Meetings.

 

10. Annual Report of companies should disclose the particulars of all general meetings held during the last three years.

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(SS-3) Secretarial Standard on Dividend

 

This Standard lays down a set of principles in relation to the declaration and payment of dividend, interim dividend, treatment of unpaid Dividends, revocation of dividends as well as the preservation of dividend warrants, maintenance of dividend registers, disclosure requirements, and matters incidental thereto.

 

The salient features of this standard are:

 

1. The dividend can be declared out of free reserves and surplus in the profit and loss account of the company. However, the dividend should not be declared out of the Securities Premium Account or the Capital Redemption Reserve Account or Revaluation Reserve or Amalgamation Reserve or out of profit on the reissue of forfeited shares or out of profit earned prior to the incorporation of the company.

 

2. Interim Dividend may be declared after the Board has considered the Interim financial statements for the period for which Interim Dividend is to be declared, after taking into account depreciation for the full year and arrears of depreciation, appropriations, and transfers to statutory reserves, taxation, Dividend at the contracted rate on preference shares and transfer to reserves as per provisions of the Companies (Transfer of Profits to Reserves) Rules, 1975.

 

3. Interim Dividends should not be declared out of reserves.

 

4. The dividend may be paid by cash, cheque, current, demand draft, pay the order, or directly through ECS.

 

5. Calls in arrears and any other sum due from a member may be adjusted against the Dividend payable to the member.

 

6. The dividend, whether interim or final, once declared becomes a debt and should not be revoked.

 

7. Unpaid/Unclaimed Dividend should be transferred to the Investor Education and Protection Fund on expiry of seven years from the date on which such Dividends were transferred to unpaid Dividend Account after giving individual intimation to the claimant shareholders.

 

8. Any interest earned on unpaid Dividend Account should also be transferred to Investor Education and Protection Fund.

 

9. Paid Dividend warrant instruments returned by the Bank and Dividend Registers should be preserved for a period of eight years.

 

10. The Balance Sheet, Annual Report, and Annual Return of the company should make separate disclosures of the amount of Dividends lying in the unpaid or unclaimed Dividend account for seven years. Annual Return and Annual Report should also disclose the amount transferred to the Investor Education and Protection Fund.

 

(SS-4) Secretarial Standard on Registers and Records

 

The standard prescribes a set of principles and good practices in relation to various registers and records including the maintenance and inspection thereof and gives a direction to the companies to establish and maintain systems that comply with all statutory provisions and meet the needs of the stakeholders. The salient features of this standard are:

 

1. The Information Technology Act, 2000 permits the maintenance of registers and records in electronic mode. Such registers and records should be maintained in accordance with the provisions of the said Act.

 

2. The standard deals exhaustive list of registers to be maintained.

 

 

(SS-5) – Secretarial Standard on Minutes

 

Every company is required to keep minutes of all proceedings of the meetings conducted during its existence. Minutes kept in accordance with the provisions of the Act, evidence that the meeting has been duly convened and held, all proceedings thereat have taken place and all appointments made thereat are valid.

 

The Minutes should contain a fair and correct summary of the discussions and decisions taken at the meeting so as to enable absentee directors/ committee members/shareholders to form an idea of what transpired at these meetings.

 

Some of the features of this Secretarial Standard which supplement the Companies Act are:

 

1. A separate Minutes Book should be maintained for each type of Meeting.

 

2. Generally, the Minutes should begin with the number and type of the Meeting and then go on to state the name of the company, day, date, venue, time of commencement, and time of conclusion of the Meeting.

 

3. Minutes of Meetings of the Board or Committee should also include:

 

i. The names of officers in attendance and invitees for specific items.

ii. If any director has participated only for a part of the Meeting, the reference to the agenda items in which he had participated.

iii. In case of a director joining through video or tele-conference, the place from and the agenda items in which he participated.

iv. The names of directors who abstained from any decision.

v. The name of Company Secretary present at the Meeting.

vi. Also, the Minutes should mention the brief background of the proposals made in the Meeting, summarise the deliberations and the rationale for taking the decisions.

 

4. The Minutes of General Meetings should also include:

 

5. The information regarding presence of the Chairman of the Audit Committee at the Annual General Meeting.

 

6. The information regarding presence if any, of the Auditors, the Practising Company Secretary who issued the Compliance Certificate, the Court appointed observers or scrutineers.

 

i.  Summary of the opening remarks of the Chairman & Summary of the clarifications provided.

 

ii. In the case of resolutions passed through postal ballot, the name of the scrutinizer appointed and the result of the ballot.

 

iii. In respect of recording the Minutes of Meetings of the Board, any document, report or notes placed before the Board and referred to in the Minutes should be identified by initialing of such document, report or notes by the Chairman or the concerned director.

 

iv. Draft Minutes should be circulated to all the members of the Board or the Committee, as the case may be, within fifteen days from the date of the conclusion of the Meeting of the Board or Committee, for their comments.

 

v. Minutes of the Meetings of all Committees should be placed and noted at a subsequent Meeting of the Board.

 

vi. Minutes of all Meetings should be preserved permanently.

 

vii. Office copies of Notices, Agenda, Notes on Agenda and other related papers should be preserved in good order for as long as they remain current or for ten years, whichever is later, and may be destroyed thereafter under the authority of the Board.

 

viii. Minutes Books should be kept in the custody of the Secretary of the company or any director duly authorized for the purpose by the Board.

(SS-6) Secretarial Standard on Transmission of Shares and Debentures

 

Realizing the divergent practices involved in the transmission of shares and the difficulties faced by both the companies and the investors, the Secretarial Standards Board has formulated the Secretarial Standard on Transmission. This Standard lays down principles in relation to the documentation and for verification of legal claimants in case of physically and electronically held shares for the smooth functioning of the process.

 

The Standard inter alia deals with situations where shares are singly or jointly held, the nominee has been appointed, the shareholder has died intestate, etc.

 

SS-6 has set standards in several areas to bring clarity and to unify the disparate practices, including:

1. Documents required

2. The time period within which the transmission process should be completed

3. Preservation

 

Briefly, the Secretarial Standard provides for the following, amongst others:

 

1. In case of transmission of shares of a sole shareholder who has appointed a nominee, the company should register the shares in the name of the nominee within a period of 30 days.

2. Similarly, in the case of transmission of shares of a sole shareholder who has not appointed a nominee, the company should register shares in the name of any other person (i.e. beneficiary of a Will or legal Heir) within a period of 30 days.

 

3. The Secretarial Standard lays down the procedure for transmission of shares in case where sole shareholder has not appointed a nominee. It clearly provides for both the situations, i.e. where the sole-shareholder dies leaving a Will and where the sole-shareholder dies intestate.

 

4. In case of transmission of shares held jointly, whether nomination has been made or not, the company should register the shares in the name of the nominee or in the name of any other person elected by such nominee, within a period of 30 days.

 

5. In respect of the transmission of shares held jointly, where no nomination has been made, the Secretarial Standard lays down provisions for different permutations and combinations covering all aspects.

 

6. The Secretarial Standard requires that every company should maintain a register containing particulars of all transmissions. The register and records pertaining to transmission should be preserved permanently and kept in the custody of the secretary of the company or any other person authorized by the Board for the purpose.

 

(SS-7) Secretarial Standard on Passing of Resolutions by Circulation

 

Decisions relating to the policy and operations of a Company are arrived at meetings of the Board, held periodically. However, it may not always be practicable to convene a meeting of the Board to discuss matters on which decisions are needed urgently. In such circumstances, the passing of a resolution by circulation can be resorted to.

 

SS-7 authorizes the Chairman of the Board or Managing Director and in their absence any other director to decide whether the approval of the Board for a particular matter is to be obtained by means of resolution by circulation.

 

The Standard also enlists a number of matters which are to be passed only at duly convened

meetings of the Board and which should not be passed by circulation. This is to ensure that the important items of business that require deliberations by the Board are passed only after necessary debate and discussion in the Board room.

 

Briefly, the Secretarial Standard provides, amongst others, for the following:

 

1. The proposed resolution with all the papers should be sent to all directors including interested directors and directors who are usually residing abroad.

 

2. There should be a note with every such resolution setting out the details of the proposal and draft of resolution proposed and also indicating how to signify assent or dissent to the resolution proposed.

 

3. The draft resolution along with necessary papers should be circulated by hand, or by post or by facsimile, or by e-mail or by any other electronic mode.

 

4. The resolution is deemed to have been passed on the date on which it is approved by the majority of the Directors.

 

5. In case a director does not append a date, the date of receipt by the company of the signed resolution should be taken as the date of signing.

 

6. The minutes of the next meeting of the Board or, the committee should record the text of the resolution passed and dissent if any.

 

7. Passing of resolution by circulation should be considered valid as if it had been passed at a duly convened meeting. This does not dispense with the requirement for the Board to meet at the specified frequency.

 

8. The standard provides, as an Appendix, list of illustrative notes to be passed at a duly convened Board meeting and which cannot be passed by circulation.

 

(SS-8) Secretarial Standard on Affixing of Common Seal

 

Substantive law is mainly silent on the fixation of the common seals. SS-8 deals with Affixing of Common Seal. The standard aims at clarifying documents which need to be common sealed and procedure thereof.

 

Briefly, the Secretarial Standard provides, amongst others, for the following:

 

1. As per the Standard, Common Seal means the metallic seal of a company which can be affixed only with the approval of the Board of directors of the company.

 

2. The Common seal should be adopted by a resolution of the Board and its impression should be made part of the minutes of the meeting in which it is adopted.

 

3. The persons in whose presence the seal is affixed should sign every instrument to which seal of the company is so affixed.

 

4. The common seal should be kept in the custody of a director of the company or the Company Secretary or any other official, as authorised by the Board.

 

5. A company whose objects require or comprise transactions of business outside India may have for use in any territory, district or place not situated in India an official seal, which shall be a facsimile of the common seal.

 

6. Use of official seal requires an enabling provision in the Articles.

 

7. The official seal should be a facsimile of the common seal.

 

8. The official seal should have engraved in it the name of the territory where it is to be so used in addition to the name and state in which the registered office of the company is situated.

 

9. The person affixing the official seal shall sign and write on the deed or another instrument, the date and place at which it is affixed.

 

10. Every company should maintain a register containing particulars of documents on which the official seal of the company has been affixed.

 

11. The register should be maintained at the office where the official seal is kept.

 

(SS-9) Secretarial Standard on Forfeiture of Shares

 

This standard lays down a set of principles for forfeiture both for equity and preference shares arising from non-payment of calls. Initiation of the forfeiture process, the effect of forfeiture, re-issue of forfeiture sales, pricing of the reissue of forfeiture shares, annulment of forfeiture of shares are the major aspects that are being dealt with SS-9.  The standard also clarifies the pricing on the re-issue of forfeited shares.

 

Briefly, the Secretarial Standard provides, amongst others, for the following:

 

1. The Articles should contain a provision for forfeiture of shares.

 

2. Forfeiture of shares requires the approval of the Board in a duly convened meeting.

 

3. If a call on the shares, together with interest accrued thereon, in accordance with the terms of issue of shares, remains unpaid after the day appointed for payment thereof, then forfeiture of shares should be made under the authority of the Board.

 

4. The notice should be served by the company on the defaulting member by registered post acknowledgment due.

 

5. The notice should state the amount of the call due and interest accrued thereon. It should specify a date (not more than 21 days from the date of posting of notice) before which the payment should be made. Also, specify that in case of non-payment forfeiture shall be offered.

 

6. The Board should approve the forfeiture at a duly convened meeting.

 

7. The date of approval by the Board in the date of forfeiture.

 

8. The Board should issue individual notices to the defaulting members whose shares have been forfeited.

 

9. Entries in the register of members should be made with regard to forfeited shares.

 

10. There should be a reference to the forfeiture of shares in the report of the directors to the shareholders.

 

11. On annulment of the forfeited shares, the name of the member should be restored in the register of members for those shares.

 

12. A forfeited share may be reissued or otherwise disposed of or such terms and in such a manner as the Board may think fit.

 

13. On reissue, the transferee should be registered as the holder of the share.

 

14. The title of the transferee should not be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, sale or disposal of the share.

 

 

(SS-10) Secretarial Standard on Board’s Report

 

The Board’s Report is the most important means of communication by the Board of Directors of a company with its stakeholders. Apart from various disclosures required under the Companies Act, this Standard seeks to lay down certain additional disclosures which are required to be made in Board’s Report under various other enactments like disclosures pursuant to employee stock option and employee stock purchase schemes, pursuant to directions of Reserve Bank of India, pursuant to directions of national housing bank directions, various disclosures under a listing agreement, etc. An attempt is made to cover every aspect for the preparation and presentation of the Board’s Report. This Standard also seeks to cover the approval, signing, dating aspects for its preparation.

 

Briefly, the Secretarial Standard provides, amongst others, for the following:

 

1. The Board’s Report should be attached to a balance sheet of the company.

 

2. As per the Standard, the disclosure in the Board’s Report are as under:

 

— state of affairs of the company;

— material changes and commitments, if any, affecting the financial position of the

company;

— amount, if any, proposed to carry to any reserves;

— amount, if any, recommended by way of dividend per share;

— particulars with respect to conservation of energy, technology, absorption and

foreign exchange earnings and outgo in accordance with the prescribed rules;

— changes during the year of the specified items;

— director’s responsibility statement;

— a statement by the Board that the company has devised proper systems to ensure

Compliance with all laws applicable to the company;

— the factors leading sickness and the steps proposed to be taken;

— specified details of the issue of sweat equity shares;

— status of the buy-back process;

— reasons for failure to implement any proposal relating to preferential allotment; to

redeem debentures or preference shares on the due date(s);

— changes in the composition of the board;

— any disqualification or vacation of office of director;

— amount transferred to Investor Education and Protection Fund;

— payment of managerial remuneration in excess of limit;

— composition of the audit committee;

— specified disclosures pursuant to the listing agreement of stock exchanges;

— specified disclosures pursuant to employee stock option and employee stock

purchase schemes;

— additional disclosures by the producer company;

— specified disclosures pursuant to directions of Reserve Bank of India;

— specified disclosures pursuant to National Housing Bank directions;

— other disclosures;

— explanations in the Board’s Report in response to Auditors’ Qualifications;

— explanations in the Board’s Report in response to Qualification of Secretary in

whole-time practice;

— information on accounts.

— The report should be considered and approved at a duly convened meeting of the

Board.

— The report and any addendum thereto should be signed by the chairman of the

Board, if any, or by  not less than two directors of the company, one of whom shall

be a managing director, where there is one;

— The report shall be the collective responsibility of all the directors though the report

may have been approved only by a majority of directors.

 

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