Secretarial Audit: A New Perspective
Khusbu Agrawal
Khusbu Agrawal (the “Valuer”) is a Fellow Member of the Institute of Company Secretaries of India (ÏCSI) having membership No. F11833. The Valuer is registered with the Insolvency and Bankruptcy Board of India (Registration No. IBBI/RV/03/2021/14393) to undertake the Valuation of Securities and Financial Assets of the Companies. She has more than 8 years of experience in Corporate law, merger & acquisitions. She has also done LLB, Master’s in Commerce and Master’s in journalism & Mass Communication. Further, Ms. Khusbu Agrawal has done post qualification course i.e. Certificate Course on Intellectual Property Rights conducted by ICSI. She is a qualified Independent Director and Social Auditor.
In the evolving world of corporate governance, compliance and transparency have become non-negotiable. Amidst this environment, Secretarial Audit has emerged as a crucial mechanism to ensure that companies are not only compliant with various laws but also with ethical standards in their operations. While traditionally viewed as a regulatory formality, a new perspective on secretarial audit shows it to be a powerful strategic tool that adds value, improves governance, and enhances the overall corporate image.
Understanding Secretarial Audit
Secretarial Audit is an independent verification of compliance with various applicable corporate laws, rules, and regulations, conducted by a practising Company Secretary (PCS).
Section 204(1) read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 prescribes the companies to which a secretarial audit is applicable. These include the following:
- Every listed company
- Every public company with a paid-up capital of Rs. 50 crores or more
- Every public company with a turnover of Rs. 250 crores or more
- Every company with outstanding loans/borrowings of Rs. 100 crores or more, taken from banks or financial institutions.
The audit involves checking adherence to laws such as:
- The Companies Act, 2013
- Securities laws
- FEMA (Foreign Exchange Management Act)
- SEBI (Securities and Exchange Board of India) – Listing Obligations and Disclosure Requirements (LODR), among others
The secretarial audit report, submitted in Form MR-3, is annexed to the Board’s report and plays a significant role in annual disclosures.
The Traditional Approach: Compliance-Centric
Historically, secretarial audits were perceived primarily as a compliance check mechanism. The main goal was to ensure that a company did not fall short of its legal obligations. The auditor’s job was to confirm whether the organization had complied with the provisions of applicable laws. Any deviation or non-compliance would be noted and reported to the Board of Directors.
This traditional view, while important, limited the scope of secretarial audits to mere tick-box compliance. It often lacked the strategic foresight that could help management identify deeper governance issues or system lapses.
A New Outlook: Strategic and Holistic Governance Tool
The modern perspective of secretarial audit repositions it from a regulatory burden to a governance enhancer. With growing stakeholder awareness, increasing regulatory scrutiny, and the demand for responsible business practices, companies are realizing the broader advantages of an effective secretarial audit.
- Promoting a Culture of Compliance
Rather than identifying faults after they occur, secretarial audits now help instill a proactive culture of compliance. Companies are starting to integrate legal compliance into their strategic decisions, ensuring that they remain alert to regulatory changes and adopt best practices pre-emptively.
- Risk Management and Early Detection
A robust secretarial audit acts as a preventive mechanism by identifying potential risks and non-compliance issues at an early stage. This early detection can save companies from penalties, reputational damage, or litigation. In essence, the audit serves as an internal watchdog, warning companies of possible governance or procedural lapses.
- Enhancing Transparency and Investor Confidence
For listed entities and companies looking to attract investors, secretarial audits serve as proof of sound governance and ethical conduct. Audit reports that are transparent and free from adverse remarks enhance investor trust. A clean audit record may also contribute to better valuations during fundraising or mergers.
- Improving Board Effectiveness
The insights gained through a secretarial audit can assist the Board of Directors in understanding compliance gaps, internal control deficiencies, and regulatory misalignments. The audit helps the board function more effectively by providing it with accurate, timely, and relevant information.
- Supporting ESG Goals
Environmental, Social, and Governance (ESG) performance is gaining ground in corporate evaluations. Secretarial audits help track governance metrics that are integral to ESG scoring. Companies aiming to meet sustainability targets and regulatory ESG disclosures find value in using audits to validate their governance credentials.
Expanding scope and future opportunities
The future of secretarial audit lies in its expanded scope. The Ministry of Corporate Affairs (MCA) may consider extending its applicability to private companies of certain sizes, especially those with significant public interest. Furthermore, as laws related to data protection, cyber compliance, and environmental standards evolve, the audit’s scope may be broadened to include such areas.
There is also an increasing demand to adopt digital audit tools and automated compliance software. Company Secretaries are now embracing technology to conduct data-driven, real-time audits that provide quicker and more precise results. This digital transformation aligns secretarial audits with global audit trends.
Challenges to address
Despite its growing relevance, secretarial audit still faces several practical hurdles:
- Resistance from Management: In some organizations, the audit is treated as a formality. Management may hesitate to share sensitive information or acknowledge lapses.
- Limited Awareness: Many small and medium enterprises (SMEs) are unaware of the advantages a secretarial audit can bring beyond compliance.
- Inadequate Scope: Since the audit covers only select laws and is performed annually, critical issues may remain undetected between audit cycles.
To overcome these challenges, there is a need for greater awareness, capacity-building, and a shift in mindset from reactive to preventive governance.
Conclusion
Secretarial Audit, when viewed through a broader lens, offers more than regulatory compliance; it promotes ethical conduct, strengthens internal controls, and enhances governance. As businesses become more complex and regulatory landscapes more dynamic, a modern and strategic approach to secretarial audits is not just recommended – it is mandatory
By embracing this new perspective, companies can turn secretarial audits into an opportunity for introspection, improvement, and long-term value creation. The role of Company Secretaries, therefore, is evolving from legal compliance officers to strategic governance advisors — a transformation that reflects the changing dynamics of the corporate world.
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