How to Conduct a Secretarial Audit Under CARO 2020: A Comprehensive Guide

How to Conduct a Secretarial Audit Under CARO 2020 requires a meticulous approach to corporate compliance, a critical challenge for companies navigating India’s complex regulatory landscape. Ensuring adherence to the myriad of laws, rules, regulations, and standards is paramount for maintaining legal standing, fostering investor confidence, and upholding robust corporate governance. A secretarial audit serves as an independent check on these vital functions, providing assurance to stakeholders and the management alike that compliance systems are effective and operations are conducted within legal boundaries. This guide delves into the intricacies of conducting a secretarial audit, with particular reference to areas that intersect with the compliance environment scrutinized under reporting frameworks like CARO 2020, offering insights for corporate secretaries, compliance officers, and legal teams.

While the Secretarial Audit itself is mandated under Section 204 of the Companies Act, 2013, for certain companies, and its report is furnished in Form MR-3, the overall compliance health verified by a secretarial audit directly impacts a company’s standing and reporting obligations under various laws. The Companies (Auditor’s Report) Order, 2020 (CARO 2020) provides specific reporting requirements for statutory financial auditors on various operational and compliance matters. Although a Secretarial Audit isn’t conducted *under* CARO 2020, a thorough secretarial audit process will naturally cover many underlying compliance requirements that financial auditors then check for reporting under CARO 2020, such as proper authorisations for loans, compliance with Section 188 for related party transactions, registration of charges, etc. Thus, a robust secretarial audit acts as a vital component of the overall compliance ecosystem, aiding companies in preparing for various internal and external audits, including the statutory audit governed by CARO 2020 reporting.

The Foundation: Understanding the Secretarial Audit Mandate and Scope

A secretarial audit is a process to check compliance with the provisions of various laws and rules/regulations, orders, etc., applicable to the company. It is conducted by a Company Secretary in Whole-Time Practice (CS in Practice). The objective is to express an opinion as to whether the company has complied with the applicable provisions of the Companies Act, 2013, the Securities Contracts (Regulation) Act, 1956, the Depositories Act, 1996, the Foreign Exchange Management Act, 1999, and rules and regulations framed thereunder, and other laws specifically applicable to the company.

Who Needs a Secretarial Audit?

As per Section 204 of the Companies Act, 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, a Secretarial Audit is mandatory for:

Every public company having a paid-up share capital of fifty crore rupees or more; or
Every public company having turnover of two hundred fifty crore rupees or more; or
Every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more.

Turnover is defined as the aggregate value of the realization of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, at any time during the immediately preceding financial year.

Defining the Scope and Period

The scope of the secretarial audit is comprehensive, covering compliance with numerous statutes and internal procedures. The audit typically covers a financial year. The auditor’s engagement letter clearly defines the scope, responsibilities, and limitations. Vivek Hegde & Co has extensive experience in defining precise and comprehensive secretarial audit scopes tailored to diverse business structures and complexities.

Key Steps in Conducting a Secretarial Audit

Conducting a secretarial audit is a structured process that requires thoroughness and expertise. Here are the essential steps:

1. Appointment and Preliminary Formalities

Engagement Letter

The process begins with the formal appointment of the Secretarial Auditor by the Board of Directors. An engagement letter is crucial; it outlines the scope of work, period of audit, responsibilities of both the company and the auditor, timelines, and fees. This ensures clarity and sets the foundation for a smooth audit process.

Understanding the Company and its Business

The auditor must gain a deep understanding of the company’s business model, industry, organisational structure, key management personnel, and the specific laws applicable to its operations. This includes identifying any sector-specific regulations.

Preliminary Risk Assessment

Based on the initial understanding, the auditor performs a preliminary risk assessment to identify areas of high compliance risk. This helps in focusing the audit efforts efficiently.

2. Information Gathering and Documentation Review

This is the most extensive phase, involving the collection and review of a vast array of documents and records.

Review of Statutory Registers

Verification of the maintenance of all statutory registers as required under the Companies Act, 2013, such as Register of Members (MGT-1), Register of Debenture Holders (MGT-2), Register of Charges (CHG-7), Register of Investments not held in company’s name (MGT-3), Register of Loans, Guarantees, Security and Acquisitions (MBP-2), Register of Contracts or Arrangements in which directors are interested (MBP-4), Register of Directors and Key Managerial Personnel and their shareholding (MGT-4). The auditor checks for proper format, completeness, timeliness of entries, and accuracy.

Scrutiny of Minutes of Meetings

Detailed review of minutes of Board Meetings, Committee Meetings (Audit Committee, Nomination and Remuneration Committee, Stakeholders Relationship Committee, CSR Committee, etc.), and General Meetings (AGM, EGM). This involves checking for proper convening, quorum, recording of decisions, compliance with Secretarial Standards (SS-1 and SS-2), and authorisation for significant transactions like loans, investments, related party transactions (which are also areas reported under CARO 2020 by financial auditors from a different lens). Vivek Hegde & Co provides expert board and committee support, ensuring minutes and meeting procedures are compliant and well-documented, facilitating smoother audits.

Examination of Filings with Regulatory Authorities

Verification of timely and accurate filing of forms and returns with the Registrar of Companies (ROC) and other authorities like SEBI, RBI, etc. This includes checking forms related to incorporation, change of name/objects, alteration of capital, appointment/cessation of directors/KMPs, charges, annual filings (MGT-7, AOC-4), etc. Delays or errors in ROC filings are common non-compliance points. The auditor verifies compliance with ROC filing requirements.

Review of Policies and Procedures

Assessment of internal policies such as Code of Conduct, Insider Trading Policy (for listed entities), Related Party Transaction Policy, CSR Policy, Whistleblower Policy, etc., to ensure they are in place, duly approved, and communicated. The auditor checks for compliance with these internal policies.

Verification of Compliance with Specific Laws

This is a critical part, involving checking adherence to provisions of key legislations:

Companies Act, 2013: Beyond registers and minutes, checking compliance related to share capital management, dividend declaration and payment, constitution and functioning of the Board and Committees, loans to directors, related party transactions (Section 188), inter-corporate loans/investments (Section 186), charges, deposits, compliances for KMPs, etc.
SEBI Regulations: For listed entities, compliance with LODR Regulations (e.g., corporate governance norms, timely disclosures, related party transactions – Regulation 23), PIT Regulations (Code of Conduct, disclosures), ICDR Regulations (if applicable), SAST Regulations (if applicable), Buyback Regulations (if applicable). Ensuring a strong corporate governance framework is key for listed companies.
Foreign Exchange Management Act, 1999 (FEMA): Compliance related to FDI, ODI, ECB, external commercial borrowings, reporting requirements to RBI.
Other Applicable Laws: Identifying and verifying compliance with laws specific to the industry or operations of the company (e.g., Environmental Laws, Labour Laws, PMLA, etc.). The secretarial audit verifies whether the company has adequate systems and processes to comply with these laws.

Review of Contracts and Agreements

Examination of significant contracts and agreements from a compliance perspective, especially those involving related parties, loans, or guarantees, to ensure proper authorization and disclosure.

3. Assessment of Adequacy and Effectiveness of Compliance Systems

The auditor evaluates whether the company has established adequate systems and processes to ensure compliance with all applicable laws, rules, regulations, and standards. This includes reviewing internal controls related to compliance monitoring. Effective compliance monitoring systems are vital.

4. Reporting – The Secretarial Audit Report (Form MR-3)

Based on the evidence gathered, the Secretarial Auditor prepares the report in the prescribed Form MR-3. The report provides an opinion on the company’s compliance. Any instances of non-compliance, observations, or qualifications are clearly stated in the report. The auditor must exercise professional judgment and due diligence.

5. Follow-up and Way Forward

After the report is submitted, the company is expected to take corrective actions on the identified non-compliances. The secretarial audit process often leads to improvements in the company’s compliance framework and internal controls.

Connecting Secretarial Audit Findings to Broader Compliance and CARO 2020

As mentioned earlier, while Secretarial Audit is a distinct process, its findings are intrinsically linked to the overall compliance health of a company. The rigorous check conducted by a secretarial auditor on areas like maintenance of statutory records, convening of meetings, adherence to procedures for related party transactions (Section 188), inter-corporate loans/investments (Section 186), and registration of charges directly provides assurance on matters that statutory financial auditors examine for their reporting under CARO 2020. For example, if the secretarial audit identifies issues with the authorization process for loans under Section 186, this is directly relevant to the financial auditor’s CARO 2020 reporting requirement on loans/investments/guarantees/security under Clause 3(iii). Similarly, compliance with Section 188 on related party transactions, verified by the secretarial auditor, aligns with the financial auditor’s CARO 2020 reporting under Clause 3(vii). Understanding How to Conduct a Secretarial Audit Under CARO 2020‘s reporting context, even if the audit isn’t directly governed by it, helps appreciate the interconnectedness of compliance frameworks. A clean or well-qualified secretarial audit report provides valuable input and highlights potential areas of concern for the financial auditor and management, reinforcing the importance of a strong corporate governance framework and diligent secretarial compliance checklist implementation.

Implementing a robust secretarial compliance checklist and engaging in regular compliance monitoring helps mitigate risks and ensures readiness for both secretarial and financial audits.

Actionable Tips for Corporate Secretaries and Compliance Teams

To ensure a smooth and effective secretarial audit process and maintain high standards of compliance, corporate secretaries and compliance teams can implement the following:

Maintain all statutory registers meticulously and keep them updated promptly with every change. Ensure they are in the prescribed format.
Ensure all Board, Committee, and General Meetings are convened and conducted strictly as per the Companies Act, SS-1, and SS-2. Draft and finalise minutes accurately and timely. Consider professional support for board and committee support.
Establish a robust system for tracking and filing all necessary forms and returns with the ROC, SEBI, and other regulators within stipulated deadlines. Leverage expertise in ROC filing requirements.
Implement strong internal controls and procedures for critical compliance areas like related party transactions, loans/investments, and charge management, including obtaining necessary approvals and maintaining documentation.
Conduct periodic internal compliance reviews to identify and rectify potential non-compliances before the formal secretarial audit commences.

Why a Robust Secretarial Audit Matters

Beyond mere statutory compliance, a secretarial audit is vital for several operational and financial reasons. It provides an independent assurance that the company is operating within the legal framework, significantly reducing the risk of penalties, fines, and legal liabilities that can arise from non-compliance. These penalties can have severe financial implications and damage the company’s reputation.

Furthermore, a thorough secretarial audit enhances the company’s corporate governance framework. By verifying adherence to best practices and regulations, it instils confidence in investors, lenders, and other stakeholders. A strong governance posture, validated by a secretarial audit, can improve access to finance, including during fundraising advisory stages, and positively impact valuation. It is a proactive governance risk management tool that identifies weaknesses in internal control systems related to compliance, allowing management to take timely corrective actions, thereby safeguarding the company’s assets and reputation.

Featured Snippet: Key Aspects of a Secretarial Audit

A Secretarial Audit verifies a company’s compliance with applicable laws. Key aspects include reviewing statutory registers, minutes of meetings, regulatory filings (ROC, SEBI), and adherence to corporate governance norms. It assesses compliance systems and reports findings in Form MR-3, enhancing transparency and mitigating compliance risks.

FAQs

Q: Which companies are mandatorily required to conduct a Secretarial Audit?

A: Public companies exceeding specific thresholds of paid-up capital (₹50 Cr), turnover (₹250 Cr), or outstanding loans/borrowings (₹100 Cr) must conduct a Secretarial Audit.

Q: What is the primary objective of a Secretarial Audit?

A: Its objective is to provide an independent assurance that a company has complied with the provisions of various laws and regulations applicable to it during the audit period.

Q: Who can conduct a Secretarial Audit?

A: Only a Company Secretary holding a Certificate of Practice (CS in Whole-Time Practice) can conduct a Secretarial Audit.

Q: How does Secretarial Audit relate to Corporate Governance?

A: Secretarial Audit evaluates compliance with corporate governance norms and principles, verifying whether established frameworks are followed in practice, thus strengthening the overall governance structure.

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Conclusion

In conclusion, while the statutory requirement for a Secretarial Audit under Section 204 stands distinct from the financial audit reporting under CARO 2020, mastering How to Conduct a Secretarial Audit Under CARO 2020‘s intersecting compliance areas is fundamental to maintaining robust corporate governance and ensuring overall regulatory adherence. A meticulous secretarial audit process, focusing on detailed documentation review and compliance verification across applicable laws, provides invaluable insights into a company’s compliance health. By proactively identifying and addressing non-compliances, companies not only fulfil their statutory obligations but also build a stronger foundation of transparency and accountability, essential for long-term sustainability and stakeholder trust. Leveraging expert company secretary services can significantly enhance the effectiveness of your secretarial audit and overall compliance framework.

Vivek Hegde & Co

How to Conduct a Secretarial Audit Under CARO 2020: Guide