What are the differences between a secretarial audit and a statutory audit?
For any company operating in India, maintaining compliance with the law is just as crucial as generating revenue. Audits are a fundamental part of this compliance framework, acting as a system of checks and balances to ensure transparency and accountability. While most business owners are familiar with financial audits, the Indian corporate landscape mandates different types of audits for different purposes. This often leads to confusion. Two of the most important yet frequently misunderstood audits are the Statutory Audit and the Secretarial Audit. This blog post will clearly break down the differences between a secretarial audit and a statutory audit, helping you understand their purpose, scope, and applicability. Gaining this knowledge is key for understanding audit types in India and ensuring your business stays on the right side of the law.
What is a Statutory Audit? A Financial Health Check
A Statutory Audit can be best described as a comprehensive financial health check for your company. It is an independent examination of a company’s financial statements and records. The primary objective of a statutory audit is to express an opinion on whether the financial statements—including the Balance Sheet, Profit & Loss Account, and Cash Flow Statement—present a “true and fair” view of the company’s financial position and performance. It is essentially a verification process to ensure that the financial information reported by the management is accurate, reliable, and prepared in accordance with the applicable accounting standards.
Purpose and Scope
The scope of a statutory audit is focused entirely on the financial aspects of a business. The auditor meticulously examines the books of accounts, supporting vouchers, and related documents to verify the accuracy of transactions recorded during the financial year. Key activities include:
- Verifying assets and liabilities.
- Checking the accuracy of income and expenditure statements.
- Ensuring compliance with Accounting Standards (AS) and Indian Accounting Standards (Ind AS).
- Detecting and preventing financial errors, misstatements, or potential fraud.
- Providing an independent opinion to shareholders and other stakeholders about the company’s financial reliability.
Who Conducts It?
A statutory audit must be conducted by an independent practicing Chartered Accountant (CA) or a firm of Chartered Accountants. The auditor must be a member of the Institute of Chartered Accountants of India (ICAI) and hold a valid Certificate of Practice. This independence is critical to ensure that the audit opinion is unbiased and trustworthy.
Governing Law in India
The mandate for a statutory audit comes directly from the Companies Act, 2013, specifically under Sections 139 to 147. These sections lay down the rules regarding the appointment, removal, qualifications, rights, and duties of an auditor. The statutory audit differences India can be traced back to this core legislation that governs financial reporting and transparency for all registered companies. For those interested in the specifics, the full text of the law is available on the Ministry of Corporate Affairs (MCA) website.
What is a Secretarial Audit? A Compliance Report Card
In sharp contrast to a financial review, a Secretarial Audit acts as your company’s compliance report card. It is not about numbers, but about rules, regulations, and procedures. The primary goal of a secretarial audit is to verify a company’s adherence to a wide range of corporate and economic laws. It provides the Board of Directors with an independent assurance that the company has robust compliance mechanisms in place and is following good corporate governance practices. This audit helps in proactively identifying non-compliances, allowing the company to take corrective action before regulatory penalties are imposed.
Purpose and Scope
A secretarial audit has a much broader, non-financial scope. It involves a thorough review of the company’s compliance with the provisions of various laws. The auditor checks:
- Adherence to the Companies Act, 2013 and its rules.
- Compliance with the Securities Contracts (Regulation) Act and SEBI regulations (especially for listed companies).
- Compliance with Foreign Exchange Management Act (FEMA).
- Adherence to other industry-specific laws applicable to the company (e.g., banking regulations, insurance laws).
- Maintenance of statutory registers, records, and board meeting minutes.
- Timeliness and accuracy of filings with the Registrar of Companies (ROC), RBI, and other authorities.
- The overall structure of corporate governance.
Who Conducts It?
A secretarial audit can only be conducted by a practicing Company Secretary (CS) who is a member of the Institute of Company Secretaries of India (ICSI) and holds a valid Certificate of Practice. A CS is a specialist in corporate law and governance, making them the ideal professional for this role.
Governing Law in India
The requirement for a secretarial audit is mandated under Section 204 of the Companies Act, 2013. This section specifies which companies are required to undergo this audit. The findings are compiled in a Secretarial Audit Report, which is submitted in a prescribed format, Form MR-3. This report is then attached to the Board’s Report, making it a public document for shareholders. The secretarial audit differences India are defined by this specific legal mandate focusing purely on legal and procedural compliance.
Key Differences Between Secretarial and Statutory Audit: A Head-to-Head Comparison
To make the secretarial vs statutory audit India comparison simple, let’s break down the core points of distinction in a clear, easy-to-understand format. The fundamental differences lie not just in what is being checked, but also in who is checking it and for what purpose.
Comparison Table
| Basis of Difference | Statutory Audit | Secretarial Audit |
|---|---|---|
| Primary Objective | To verify the truth and fairness of financial statements. | To check compliance with various corporate laws and regulations. |
| Conducted By | A practicing Chartered Accountant (CA). | A practicing Company Secretary (CS). |
| Governing Section | Sections 139 to 147 of the Companies Act, 2013. | Section 204 of the Companies Act, 2013. |
| Scope of Audit | Financial records, books of accounts, vouchers, and related documents. | Board minutes, statutory registers, compliance filings, and adherence to corporate governance norms. |
| Report Submitted | Auditor’s Report to the shareholders. | Secretarial Audit Report (Form MR-3) to the Board of Directors, which is attached to the Board’s Report. |
| Focus Area | Financial Prudence & Accuracy. | Legal & Procedural Compliance. |
Audit Applicability: Does Your Company Need These Audits?
This is perhaps the most critical question for any business owner. Understanding the applicability of these audit types for companies in India is essential for staying compliant. The criteria for each audit are vastly different.
Who Needs a Statutory Audit?
The rules here are straightforward and wide-reaching. A statutory audit is mandatory for every company registered in India under the Companies Act, 2013, irrespective of its turnover or nature of business. This includes:
- Private Limited Company
- One Person Company (OPC)
- Public Limited Company
- Section 8 Company (Non-profit)
Furthermore, Limited Liability Partnerships (LLPs) are also required to get their accounts audited if their annual turnover exceeds ₹40 lakh or their total capital contribution exceeds ₹25 lakh in a financial year. If you are in the process of setting up your business, our experts at TaxRobo can guide you through all the necessary steps, including Company Registration and annual compliance management.
Who Needs a Secretarial Audit?
Unlike the statutory audit, a secretarial audit is applicable only to larger companies that meet specific thresholds. This means that most small and medium-sized private limited companies are not required to conduct a secretarial audit. The requirement applies to:
- Every listed company.
- Every public company having a paid-up share capital of ₹50 Crore or more.
- Every public company having a turnover of ₹250 Crore or more.
- Every company (including private companies) having outstanding loans or borrowings from banks or public financial institutions of ₹100 Crore or more.
If your company does not fall into any of these categories, you are exempt from the mandatory secretarial audit.
Conclusion
In conclusion, while both audits are crucial for good corporate governance, the fundamental differences between a secretarial and a statutory audit lie in their objective, scope, and the professionals who conduct them. A statutory audit is your company’s financial health check conducted by a CA, ensuring your books are accurate and fair. A secretarial audit, on the other hand, is your legal compliance report card prepared by a CS, ensuring your operations adhere to the letter of the law. Understanding these requirements is vital for avoiding steep penalties, building stakeholder trust, and ensuring the smooth, long-term operation of your business.
Navigating India’s corporate compliance landscape can be challenging. Whether you need assistance with your company’s statutory audit, accounting, or GST filing, TaxRobo’s team of experts is here to help. Contact us today for a consultation!
Frequently Asked Questions (FAQs)
Q1: Is a statutory audit mandatory for a new startup registered as a private limited company?
A: Yes, a statutory audit is mandatory for every company registered under the Companies Act, 2013, regardless of its size or turnover, right from its first year of operation.
Q2: Can the same person be our statutory auditor and secretarial auditor?
A: No. A statutory audit must be conducted by a qualified Chartered Accountant (CA), whereas a secretarial audit must be conducted by a qualified Company Secretary (CS). They are distinct professions with different skill sets and legal mandates.
Q3: What are the consequences of not conducting a mandatory audit in India?
A: Non-compliance with mandatory audit requirements can lead to significant penalties for the company and its directors, as prescribed under the Companies Act, 2013. This can include hefty fines and, in some cases, imprisonment for officers in default.
Q4: My business is an LLP. Do I need these audits?
A: LLPs are required to have a statutory audit if their annual turnover exceeds ₹40 lakh or their total capital contribution exceeds ₹25 lakh. A secretarial audit is generally not applicable to LLPs unless specified under a particular law or agreement.
