Secretarial Audit: Mitigating the compliance risk

Introduction

 

Secretarial Audit! What’s it? In the Kenyan (or even African) perimeters, this is a new term and many, both business people and Corporate Secretarial practitioners, may get perplexed by the mere mention of the term, just like any other layman. On the contrary, in other countries like India, there are legal provisions in the companies Act that make it mandatory to have a Secretarial Audit (annually).

Section 204(1) of The Indian Companies Act of 2013 provides for mandatory production of a secretarial audit report for listed and public limited companies as per its given classes. Neither the Companies (Act Cap 486) or Companies Act No. 17 of 2015 of Kenya have such provision. So, why be concerned about it in the Kenyan perimeters then?

Why Secretarial Audit is relevant in Kenya now?

Secretarial Audit is a process like any other audit focused on verifying the compliance of a company with the various laws e.g. The Companies Act and other business laws applicable or relevant to the company.

Like any other audit, one may be tempted to look at Secretarial Audit as an unnecessary extra cost to a company, but is it so? Or are there any other greater costs than the cost of a secretarial audit?  Is secretarial audit relevant in Kenya bearing in mind that it does not have any legal back up in The Companies Act No. 17 of 2015?

Read also The Cost of Compliance : Companies Act No. 17 of 2015

My simple answers to the above questions are; no, yes and yes. The new companies Act No. 17 of 2015 has numerous legal provisions to be complied with by all companies especially the listed and public companies.

The Act also comes in handy with heavy penalties on noncompliance even on minor aspects with the minimum penalty being Shs 200,000. This, makes Secretarial Audit a necessary cost to all companies and company officials. The only one sure way to check yourself, is to have yourself checked.

The current trend by regulators

I believe it’s in light of the new companies Act that The  Institute of Certified Public Secretaries has intensified its seminars and training on matters of secretarial audit and governance audit (we shall cover governance audit in our future article). The institute seeks to accredit more practitioners on secretarial and governance audit. Why? Is there a link with the new enormous compliance requirements? Yes!

The Certified Secretaries course also saw a new dawn in the latest syllabus review by the Kenya Accountant & Secretaries Examination Board, introducing Secretarial audit as a unit in its course. Where are we headed then?

The same system that’s providing stringent and many confusing legal provisions, is offering a way out on how to stay on the right path –Secretarial Audit.

Objectives of a Secretarial Audit

The main objectives of a secretarial audit are as follows:

1. To identify and point out aspects of non-compliance and or insufficient compliance by the company.
2. To check and report on matters of non-compliance to the shareholders, regulators and other relevant parties.
3. To ensure protection of interests of customers, employees, society, government, suppliers, financiers and investors.
4. To avoid unnecessary legal actions by regulators, law enforcement bodies and other persons.

In Kenya, regulators and other law enforcement agencies do not have any legal requirement to enforce conduct of a secretarial audit. This points out then that, Secretarial Audit in Kenya, for the time being, can be focused on benefiting the company, internally, just like an internal audit, hence putting the company on a safe plane on its legal obligations.

Scope of Secretarial Audit

A secretarial audit’s scope revolves within verification of compliance with legal enactments, industry or business regulations, guidelines (general or specific) and other rules concerning the respective business.

In Kenya, a secretarial audit would cover compliance with the following (just a few):

1. The Companies Act No 17 of 2015.
2. The Central Depositories Act, regulations and rules therein.
3. Capital Markets Authority general regulations.
4. Finance Act.
5. State Corporations Act (For state corporations).
6. Capital Markets Authority Act.
7. Securities Exchange rules.

The above list is not comprehensive of all the regulations, albeit, at least in each industry, there’s a specific regulation and a company is required to move its head through and make sure it sticks up at the right point of each. A simple mistake, could be costly to the company both in time, money and reputation.

narrowing down to the Companies Act No. 17 of 2015, among the matters (also not comprehensive, just a tip of the iceberg) a secretarial audit would seek to verify and confirm include:

1. Compliance with the Companies Act in effecting changes in the ; Name of the company, registered office, principle place of business, particulars of holdings in subsidiaries, share capital, company secretaries, Memorandum of Association, Articles of Association, directors, auditors, promoters, managerial renumeration, officers in default e.t.c.
2. Directors’ compliance with; eligibility for appointment, independence and compliance with code of business conduct, disclosure of interests and concerns in contracts and arrangements and other directorships in related companies.
3. Borrowings have been made within the borrowing powers of directors and that the company has not defaulted in repayment of public deposits, unsecured loans and debentures.
4. The companies Annual General Meetings and Directors meeting have been conducted as provided for in the articles.
5. Notices for meetings have been issued according to the provisions of the Companies Act.
6. Dividend declaration and payments has been made within the provisions of the Companies Act.

As I mentioned, the above is just a tip of an iceberg, even an experienced secretarial practitioner may still forget something or have an error somewhere which may resurface at a time too late to avoid the cost.

Benefits of a secretarial audit

Just to highlight, although I believe the points stick out clearly already. Some of the merits of considering having a secretarial audit include:

1. It’s a proactive measure for compliance with the various laws and regulations which will minimize or help avoiding the penalty burden from regulatory and law enforcement bodies.
2. Minimizes time of regulatory check due to timely and improved or high degree of compliance.
3. Saves company officers from fines and other legally actionable liabilities by ensuring that they are compliant.
4. It functions as the perfect diligence check exercise by an acquirer of a company or controlling interest.
5. it ensures that the management of the company is conducted according to the interests of the investors and legal requirements.
6. It ensures that company officers charged with specific duties, carry out those duties according to the legal provisions.

Hence, it will be a prudent decision by any company officer to have a secretarial audit carried out at least once in a year or semi-annually. The question then remains, who is certified to carry out a secretarial audit?

The future

The certification is in progress, some ICPSK members have already been accredited, it is my prediction that by the time all members get accredited, Secretarial Audit may be a legal obligation, but before then, this is a necessary cost to any company that seeks to minimize its compliance risk.