TOPICS COVERED. Planning for Secretarial Audit; Auditor Engagement; Understanding the compliance history of the listed company;

Transcription

1 SECRETARIAL AUDIT

2 TOPICS COVERED Planning for Secretarial Audit; Auditor Engagement; Understanding the compliance history of the listed company; Assessment of laws applicable to the company; Forming of Opinion; Auditor s independence;

3 STATUTORY RECOGNITION Section 204 read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014: Every listed Company; Every Public Company having a paid-up share capital of Rs. 50 crore or more; Every Public Company having a turnover of Rs. 250 crore or more Shall appoint a Practicing Company Secretary (PCS) for conducting Secretarial Audit; And annex with its Board s report, a Secretarial Audit Report, given by such PCS. In the Form MR-3.

4 PLANNING FOR SECRETARIAL AUDIT An Audit plan is the specific guideline to be followed when conducting an audit. It helps the auditor to obtain sufficient appropriate evidence for the circumstances, helps keep audit costs at a reasonable level and helps avoid misunderstandings with the client. Initial discussions with the client and decide the scope of Audit; Preparing list of documents to be checked Share list of documents required for Audit with client Staffing for the audit; Review of documentation from previous audits; Outside assistance, if required; Scheduling of Audit with the client i.e. Quarterly/ Half Yearly/ Annually;

5 PROCESS OF SECRETARIAL AUDIT Share the List of documents/information required for Audit with the client Discussion on Audit Observations with Management Submission of Audit Report Verification of documents/information & recording of facts/ informations for audit evidence Preparation and Submission of Audit Observations with Management Take requisite corrective actions. Noting the Audit observations & share the same with the client Getting response from client for Audit Observations

6 DOCUMENTS REQUIRED MOA, AOA, any shareholding agreement with PE investors, JV Partner or any other material contract or document All Statutory Registers/Records Notices, Agenda, Minutes and attendance registers of meetings Disclosures, Declarations, Newspaper Publications, Agreement with Share Transfer Agent under the Act as well as SEBI Laws Financial Statement, Reports of Director s and Auditor s Filings with ROC/ STXs/ RBI or other regulatory authorities Relevant approvals/ correspondence with ROC/ STXs/ RBI or other regulatory authorities Observation/ instruction of Judicial/ Quai judicial body/ Regulators Statements for borrowings and investments

7 AUDITOR ENGAGEMENT From Company s point of view Seek credential of Auditor/ Audit Firm. Obtain consent/ eligibility of Secretarial Auditors including indicative remuneration. Placing of such consent/ eligibility before board and pass resolution thereat for the appointment. Intimate such appointment to Secretarial Auditors. Intimate such appointment to ROC by e-form MGT-14. Receive Engagement letter from Secretarial Auditors containing scope of audit, functioning, methodology, remuneration etc.

8 AUDITOR ENGAGEMENT From Auditor s point of view Before commencement of any audit, the Auditor should have an engagement letter depicting full details regarding: Scope of work; Responsibility of management and auditor; Audit fee and billing arrangements; Advisable to send two copies of such engagement letter to the client and obtain a confirmed copy of such letter from the client before taking up the assignment; Limitations of audit; Also intimate to earlier incumbent, if any, regarding appointment as Secretarial Audit [as per the Company Secretaries Act,1980].

9 UNDERSTANDING THE COMPLIANCE HISTORY OF THE LISTED COMPANY Incorporation and Promoters, Directors Details Capital Build up through Public Offering, Private Placement or through any other means. Compliance of non-mandatory provisions Litigations by/ against the Company Complexity of Business structure

10 UNDERSTANDING THE COMPLIANCE HISTORY (CONT.) Stock Exchanges filings Offer Document/ Information Memorandum Report of Credit rating Agency/ Proxy Advisory Firms Website of the Company Inspection through MCA Portal Report of Statutory Auditor, Cost Auditor & Internal Auditor News reports

11 ASSESSMENT OF LAWS APPLICABLE TO THE COMPANY LAWS LISTED IN THE MR-3

12 ASSESSMENT OF LAWS APPLICABLE TO THE COMPANY (CONT.) SEBI Act, 1992 SEBI ICDR SEBI SAST SEBI POIT SEBI ESPS SEBI Delisting Guidelines SEBI Issue of Debt Securities SEBI R&TA Regulations SEBI Buy Back Regulations FEMA Laws

13 SCOPE OF AUDIT Checking the compliances of the provisions of other laws specifically applicable to the Company. Checking of the adequacy of systems and processes in the company to monitor and ensure compliance all other applicable laws, rules, regulations and guidelines.

14 ASSESSMENT OF LAWS APPLICABLE TO THE COMPANY (CONT.) Insurance Sector Tobacco Industry Pharmaceutical Industry Other laws as may be applicable specifically to the company- Industry Wise Sugar Industries Oil, Gas & Petroleum Industry And so on

15 ASSESSMENT OF LAWS SPECIFICALLY APPLICABLE TO THE COMPANY (CONT.) Discussion with the Company; Reference to the laws disclosed under Offer document/ Information memorandum filed by the Company or its peer group Companies; Reference to indicative list of specifically applicable laws prescribed by ICSI;

16 ASSESSMENT OF LAWS APPLICABLE TO THE COMPANY (CONT.) Examining and reporting whether Adequate Systems and Processes are in place to monitor and ensure compliance with general laws applicable to the Company like labour laws, competition law and environmental laws. In case of financial laws like Tax laws, Customs etc., Secretarial Auditor may rely on the Reports given by Statutory Auditor or other designated professionals. [As per SCOPE AND SECTORWISE INDICATIVE LIST OF LAWS prescribed by ICSI]

17 ASSESSMENT OF LAWS APPLICABLE TO THE COMPANY (CONT.) How to check adequacy of systems and processes Identification of applicable laws. Responsibility for compliance. Listing out and Scheduling of activities. Implementation and documentation. Reporting pattern for compliance/ non-compliance. Monitoring of function. Verification of function and reporting. Corrective Measures. Learn about its compliance responsibilities. Ensure that employees understand these responsibilities. Ensure that requirements are incorporated into processes. Review operations to ensure responsibilities are carried out and requirements are met.

18 FORMING OF OPINION Secretarial Audit is a process of the forming opinion on compliance of applicable statutory provisions and adherence to good corporate practices by a company; For formation of this opinion, the Auditor will examine, re-examine, check, re-check the books, papers, minute books, forms and returns filed and other records maintained by the company, communication from regulator/ other stakeholders and adequacy of systems & processes;

19 FORMING OF OPINION (CONT.) Audit Opinion required to be given in MR-3 I/We have conducted the secretarial audit of the compliance of applicable statutory provisions and the adherence to good corporate practices by. (name of the company) (hereinafter called the company). Secretarial Audit was conducted in a manner that provided me/us a reasonable basis for evaluating the corporate conducts/statutory compliances and expressing my opinion thereon.

20 FORMING OF OPINION (CONT.)..I/We hereby report that in my/our opinion, the company has, during the audit period covering the financial year ended on.., complied with the statutory provisions listed hereunder and also that the Company has proper Board-processes and compliance-mechanism in place to the extent, in the manner and subject to the reporting made hereinafter:

21 FORMING OF OPINION (CONT.) During the period under review the Company has complied with the provisions of the Act, Rules, Regulations, Guidelines, Standards, etc. mentioned above subject to the following observations: Note: Please report specific non compliances/ observations/ audit qualification, reservation or adverse remarks in respect of the above para wise.

22 FORMING OF OPINION (CONT.) I/we further report that there are adequate systems and processes in the company commensurate with the size and operations of the company to monitor and ensure compliance with applicable laws, rules, regulations and guidelines. Note: Please report specific observations/ qualification, reservation or adverse remarks in respect of the Board Structures/system and processes relating to the Audit period.

23 FORMING OF OPINION (CONT.) The auditor shall express a qualified opinion when: (a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or (b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive. [ICAI SA 705]

24 FORMING OF OPINION (CONT.) Adverse remarks o The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements. [ICAI SA 705]

25 FORMING OF OPINION (CONT.) Reservation/ disclaimer o o If the 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 thereof. 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 and papers were in the custody of another person who is not available or any government authority). If such reservations are so material, the auditor should state in the MR-3 that in the absence of necessary information and records, he is unable to report on compliances relating to such areas. [ICSI Guidance Note]

26 FORMING OF OPINION: SOURCE Verification of books & papers, minutes book, financial statements, forms, returns etc. filed and other relevant documents. Examination of effectiveness of board process and compliance mechanism of the Company should be done as examination of each and every document is not possible;

27 FORMING OF OPINION: SOURCE Checklist/ working sheets and collect the audit evidence; Examination of transaction/ event wise compliances required to be done by the Company; Audit trail [i.e. a system that traces the detailed transactions relating to any item] should be maintained.

28 FORMING OF OPINION: SOURCE Written explanations should be obtained, to the extent possible, from the Company/ its officer etc. for any query asked by the auditor; Whether documentation of compliance are kept with the Company? Whether there are frequent noncompliances in compliances.

29 FORMING OF OPINION: SOURCE Whether defaults have been corrected? Whether reporting of compliance and verification is made to Board Level? Whether audit committee/ Board is updated about the non- compliances? Show cause notices were received? Materiality of lapses in compliances?

30 FORMING OF OPINION SOME QUAIFICATIONS FOUND IN THE SECRETARIAL AUDIT REPORTS

31 FORMING OF OPINION: Challenges What should be done in case of difference of opinion in interpretation of any provision between the Company and the Auditor? How to decide materiality of any noncompliance?

32 FORMING OF OPINION: Challenges Which observations are reportable and which are non- reportable; Whether the Company has acted on the advise/opinion of other fellow professional; Whether formation of Audit opinion may be based on other professional audits/reports;

33 FORMING OF OPINION: Challenges Who will decide whether any non- compliance was done with intent to deceive or not under fraud reporting; Which kind of offence under the Act should be reported to Audit Committee/ CG, as fraud under Section 143(12) of the Act;

34 FORMING OF OPINION As per defined under the CA, 2013:- For the purposes of section 447- fraud in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or 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;

35 FORMING OF OPINION Reporting with qualification A qualification, reservation or adverse remark should be stated in the MR-3 in bold or in italics. [Guidance note on Secretarial Audit as Issued ICSI]

36 AUDITOR S INDEPENDENCE Auditor independence can be defined as a reference to the independence of auditors from parties that might have a financial interest in the business being audited. The state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional scepticism.

37 AUDITOR S INDEPENDENCE The use of the word independence on its own may create misunderstandings. Standing alone, the word may lead observers to suppose that a person exercising professional judgment ought to be free from all economic, financial and other relationships. This is impossible, as every member of society has relationships with others.

38 AUDITOR S INDEPENDENCE The Code of Ethics for Professional Accountants, issued by International Federation of Accountants (IFAC) defines the term Independence as follows: Independence is: (a) Independence of mind the state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism; and (b) Independence in appearance the avoidance of facts and circumstances that are so significant a reasonable and informed third party, having knowledge of all relevant information, including any safeguards applied, would reasonably conclude a firm s, or a member of the assurance team s, integrity, objectivity or professional scepticism had been compromised.

39 AUDITOR S INDEPENDENCE Threats to Independence of Auditor- The Code of Ethics for Professional Accountants, prepared by the International Federation of Accountants (IFAC) identifies five types of threats. These are: 1) Self-interest threats. 2) Self-review threats. 3) Advocacy threats. 4) Familiarity threats. 5) Intimidation threats.

40 AUDITOR S INDEPENDENCE Safeguards to Independence: For the public to have confidence in the quality of audit, it is essential that auditors should always be and appears to be independent of the entities that they are auditing. In the case of audit, the key fundamental principles are integrity, objectivity and professional skepticism, which necessarily require the auditor to be independent. Before taking on any work, an auditor must conscientiously consider whether it involves threats to his independence.

41 AUDITOR S INDEPENDENCE When such threats exist, the auditor should either desist from the task or, at the very least, put in place safeguards that eliminate them. All such safeguards measure needs to be recorded in a form that can serve as evidence of compliance with due process. If the auditor is unable to fully implement credible and adequate safeguards, then he must not accept the work.

42 Sanjay Grover & Associates Company Secretaries Sanjay Grover & Associates B-88, 1 st Floor, Defence Colony New Delhi Ph Fax: contact@cssanjaygrover.in