Secretarial audit in the offing for private companies2 min read . Updated: 06 Oct 2019, 12:53 PM IST
- Experts said that the move to extend secretarial audit to private limited companies too will improve compliance
- It will help to bring to light compliance related issues that the statutory auditor who does financial audit of companies does not flag
Private limited companies will soon have to do secretarial audit if public interest in them is large, as defined by their exposure to debt.
Although private companies do not raise funds from the public in terms of equity, exposure to financial institutions and banks make them key players in the system and hence need greater oversight, as per the government.
Corporate affairs secretary Injeti Srinivas said at a function on Saturday that mandatory secretarial audit may have to get extended to private companies which have outstanding (debt) beyond a threshold, The Economic Times reported on Sunday. The report said this might be necessary in cases where companies have borrowed heavily from banks.
Secretarial audit is an audit of compliance of the Companies Act, securities laws, Foreign Exchange Management Act and various regulations and guidelines. It is done by a company secretary and is different from the statutory audit performed by chartered accountants. At present, secretarial audit is compulsory for listed companies and large public limited companies defined in terms of their paidup capital and turnover. The move is to extend this to private companies too. Private limited companies have comparatively less disclosure requirements compared to public limited ones. To get listed, a private limited entity has to first become a public limited company. Secretarial audit is at present applicable on private companies that are subsidiaries of listed entities.
Experts said that the move to extend secretarial audit to private limited companies too will improve compliance. Also, it will help to bring to light compliance related issues that the statutory auditor who does financial audit of companies does not flag.
“Secretarial audit is the most important tool for early detection of the root cause of violations by companies that may be indicative of practices that may eventually result in frauds. If such trends are arrested at an early stage, it can prevent corporate wrongdoings. The scope of secretarial audit also needs to change. It has to assess whether companies complied with the law not only in letter, but in the spirit as well," said Pavan Kumar Vijay, founder of advisory firm Corporate Professionals. Vijay also said that the scope of secretarial audit has to be extended to all laws applying to companies.
The spate of corporate governance failures in systemically important entities in the recent past including in Infrastructure Leasing & Financial Services Ltd. has prompted the government to tighten rules and step up oversight of the auditing and rating agencies while addressing the liquidity concerns of businesses.