SECRETARIAL AUDIT… “COMPANIES ACT , & ALLIED LAWS” AT MUMBAI ON 28 TH MARCH 2015 PRESENTATION BY CS B NARASIMHAN • 1
SECRETARIAL AUDIT … GENESIS February 2000 – Corporate Governance (Clause 49) Companies (Compliance Certificate) Rules, 2001 (Section 383A) Secretarial Audit Report as envisaged by SEBI for reconciliation of total admitted capital with depositories and total issued and listed capital (CA or CS) December 2002 Annual Return Certification Due Diligence certificates / reports for IPO, open offer, bonus issue, GDR issue, etc. ..All were some type of reassurance MCA Voluntary Guidelines, 2009 … Post Satyam Fiasco “Reconciliation of Share Capital Audit” in September 2010 Secretarial Audit and Annual Return certification (Companies Act 2013) • 2
NEED FOR S A & WHOM DOES IT BENEFIT? Multiplicity and Complexity of Laws and Regulations Need for a comprehensive and manageable compliance system Secretarial Audit would be the mechanism to firstly protect the interest of all the stake holders and secondly to avoid any non compliance leading to legal actions Gives assurance to: Promoters of Companies Directors more specifically the Independent Directors Management, who are entrusted with responsibility Investors ( Including all the Shareholders) Creditors / Trustees, Credit Rating Agencies Government & Regulatory Authorities Other Stakeholders • 3
SECRETARIAL AUDIT FOR COMPANIES (SEC 204) Companies covered: (a) Every Listed Company (includes Companies whose debentures, warrants are listed) (b)Other class of companies : (i) Every Public Company having a paid up share capital of fifty crore rupees or more (ii) Every public company having a turnover of two hundred fifty crore rupees or more IS SECRETARIAL AUDIT A PANACEA FOR ALL ILLS ???? • 4
SECRETARIAL AUDIT FOR COMPANIES (SEC 204) Secretarial Audit Report shall be annexed to Board’s Report Board in their Report to explain in full any qualification or observation or other remarks made by PCS in his report Format of Secretarial Audit Report shall be in Form MR-3 For contravention – company, every officer who is in default and PCS punishable with fine – Rs 1 lakh to Rs 5 lakhs Entities not Covered Private Limited Companies Companies with less paid up Capital but with large public interest, say companies with huge borrowings • 5
APPOINTMENT OF SECRETARIAL AUDITOR The Secretarial Auditor would be required to be appointed in the board meeting of the Company and the remuneration of the Auditor will also be determined in the aforementioned board meeting [ Section 179(3) ]. What should be the fees?????(Seek Quote)!!!!! Management may prefer less fees, but at what cost??? Company is required to file the certified true copy of the resolution passed in the aforementioned board meeting with the Registrar of Companies as an attachment in e-form MGT – 14. However, prior to the appointment, the Company would be required to obtain the consent of the Secretarial Auditor. Period for which appointment to be made … ..Act Silent Would Rotation of Secretarial Auditor preferred??? • 6
ELIGIBILITY , QUALIFICATIONS AND DISQUALIFICATIONS OF SECRETARIAL AUDITOR Excepting the fact that the Auditor should be a PCS there is no other legal provisions in the Act … Any PCS?? Who can do justice to this assignment??? Suggested similar requirements as are set out in the Act for Statutory Auditors and applicable to Cost Auditors. For Listed entities suggest that peer review be made mandatory like done for Statutory Auditors Disqualifications could also be based on Disciplinary action taken by ICSI for eg. Removal of name from the ROM. • 7
REMOVAL & RESIGNATION OF SECRETARIAL AUDITOR Removal of Secretarial Auditor – no provisions in the Act Resignation of Secretarial Auditor – Board to note and file form with RoC (not specified) Secretarial Auditor also to file form with RoC (not specified) Appointment of Secretarial Auditor on casual vacancy??...How and when to do???? • 8
DOCUMENTS REQUIRED FOR AUDIT Prepare a Response sheet indicating broadly the various Check Points ( Evolving one) Will give an indicative idea of the complexity and work involved How much time will it take???? For 2014-15 and 2015 onwards????? Notice, agenda, notes on agenda minutes of meetings, attendance registers Draft Financial Statements, Auditor’s Report, Director’s Report Any SCN- Any Audit Observations • 9
DOCUMENTS REQUIRED FOR AUDIT All Statutory Registers Disclosures / consents / declarations Filings with RoC / regulatory authorities / RBI Filings / submissions to Stock Exchanges Relevant approvals / correspondence Compliance certificates of functional heads for compliance of applicable laws Whose Report precedes whom???? Statutory Auditor or Secretarial Auditor? • 10
SCOPE OF AUDIT & ITS METHODOLOGY Determine scope of Audit Request for details of various corporate actions / events subject to audit Develop the audit framework (how and when to do what) Ascertain applicable laws Prepare check-lists and time schedule Call for documents / information • 11
SCOPE OF AUDIT & ITS METHODOLOGY Obtain Management Representation Letter Discuss and seek clarification, if required Discuss draft report with Management Finalize and submit draft addressed to shareholders For FY 2015 the audit invariably be a combined one time effort From next year onwards prefer doing quarterly to coincide with meetings of the Board Check list part of Guidance Note on SA Of ICSI.. Should this suffice???? • 12
SCOPE OF AUDIT & ITS METHODOLOGY Should not be tick the box approach!!!! Would give confidence to the Board as well May be set up a meeting with Independent Directors like Audit Committee meeting with the Statutory Auditors??? Report is for the financial year ended 31 st March Report is to be addressed to the Members similar to Statutory Auditors’ Report Work has just started and the Council is already looking into restricting the number. Is this a good sign????..Views in the matter???? Remember this is not a Compliance Certificate!!!!! • 13
S A REPORT FORM NO MR – 3 Parts of Secretarial Audit Report: (a) Para 1: Preamble (b) Para 2: Report in general (based on verification of the company’s books, papers, minute book, forms and returns filed and information provided) that the company has complied with the statutory provisions listed in the report that the company has proper Board processes and Compliance mechanism What would be a good Board Process??(219 to 229 of GN) And a good compliance Mechanism?? • 14
S A REPORT FORM NO MR – 3 BOARD PROCESS Board Process Well-informed and high-quality decision making is a critical requirement for a board to be effective and does not happen by accident. Flawed decisions can be made with the best of intentions, with competent individuals believing passionately that they are making a sound judgment, when they are not. Many of the factors which lead to poor decision making are predictable and preventable. Boards can minimize the risk of poor decisions by investing time in the design of their decision making policies and processes, including the contribution of committees……… UK Financial Reporting Council While the conceptual importance of boards of directors in modern day businesses is undisputed, it is equally crucial to study the relationship between board of directors and board performance. • 15
BOARD PROCESS • Established ground rules for meeting behaviors? • Encourage directors to actively participate in meetings? • Meeting of Independent Directors • Women Director • Is the meeting agenda logically structured • Allow adequate time for discussion based on Importance • Is the board pack delivered at least 7 days prior • Do the board papers follow a standard format? • Review the content and format of the board papers? • 16
BOARD PROCESS • Do the minutes of board meetings provide an accurate account of the board’s decision • Are the minutes distributed to directors • Do the minutes describe and record all declared conflicts of interest? • Follow up on items of Board Meetings • Comprehensive calendar for its annual activities? • Each committee have a charter or terms of reference that clearly sets out its roles and responsibilities? • Does the board regularly review its committee structure? • 17
BOARD EVALUATION • Points to be covered in the Board evaluation should be: • - Clear knowledge of the Organization's Mission and Purpose • - Engage in Strategic Process • - Foster a conscious culture • - Board work program • - Strategic thinking skills of Board and CEO. • 18
BOARD EVALUATION • - Ensure Sound Risk Management Policies • - Support the CEO and Review CEO's Performance • - Relationship between Board, CEO and senior officials one level below the Board • - Enhance the Organization's Public Image • - Carefully Select and induct new Board members • - Individual Board member Self-Evaluation • 19
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