[Opinion] Company & Its Directors End Up Paying a Penalty of Rs. 3 Lakh for Not Appointing an Internal Auditor
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- Last Updated on 3 October, 2023
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Prof R Balakrishnan – [2023] 154 taxmann.com 614 (Article)
1. Internal Audit
As per the definition given by the Institute of Internal Auditors, USA, internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. Internal audit is performed by professionals with an in-depth understanding of the business culture, systems, and processes, the internal audit activity provides assurance that internal controls in place are adequate to mitigate the risks, governance processes are effective and efficient, and organizational goals and objectives are met.
2. Purpose of internal audit
The internal audit is done by checking whether the company has complied with all the applicable laws and thereafter, a report is prepared by the Internal Auditor stating the compliances and material deviations if any. The internal auditor has to ensure that he should keep in mind the requirements with respect to internal audit as per the Companies Act, 2013. The Companies Act 2013 does not prescribe any format or procedure in the Act to conduct an internal audit or to prepare a report thereof. Therefore, the companies have the privilege to conduct the internal audit as per their size and requirements. However, the report so prepared is required to mention the compliances and the deviations found if any and the method to rectify the errors so found. The process should be given due weightage as it analyses the state of affairs of the Company and should be conducted fairly and transparently with reference to the risk and internal checks and internal control mechanism.
3. Provisions of the Companies Act 2013 relating to this case
The following are the relevant provisions relating to this case.
| Companies Act 2013 Chapter IX – Accounts of Companies Section 138 – Internal Audit |
|
| Section | Provision |
| 138(1) | Such class or classes of companies as may be prescribed shall be required to appoint an internal audit, who shall either be a chartered accountant or a cost accountant or such other professional as may be decided by the board to conduct internal audit of the functions and activities of the company. |
| 138(2) | The Central Government may, by rules prescribed the manner and the interval in which the internal audit shall be conducted and reported to the board. |
| Companies (Accounts) Rules 2014 (effective from 1st April 2014) Rule 13 – Companies required to appoint Internal Audit |
|
| Rule 13(1) | The following class or companies shall be required to appoint an internal auditor which may be either an individual or a partnership firm or a body corporate namely:- |
| Rule 13(1)(a) | Every listed company |
| Rule 13(1) (b) | Every unlisted public company having:- |
| Rule 13(1) (b) (i) | paid up share capital of fifty core rupees or more during the preceding financial year or; |
| Rule 13(1) (b)(ii) | turnover of two hundred core rupees or more during the preceding financial year or; |
| Rule 13(1) (b)(iii) | outstanding loans or borrowing from banks or public financial institutions exceeding one hundred core rupees or more at any point of time during the preceding financial year or; |
| Rule 13(1) (b)(iv) | outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year or; |
| Rule 13 (c) | Every private company having |
| Rule 13 (c)(i) | turnover of two hundred core rupees or more during the preceding financial year or; |
| Rule 13 (c)(ii) | outstanding loans or borrowing from banks or public financial institutions exceeding one hundred core rupees or more at any point of time during the preceding financial year or; |
| Proviso | Provided that an existing company covered under any of the above criteria shall company with the requirements of section 138 and this rule within six months of commencement of such section. |
| Explanation | For the purpose of this rule:- |
| (i) | the internal auditor may not be an employee of the company |
| (ii) | the term chartered accountant or cost accountant shall mean a chartered accountant or a cost accountant as the case may be, whether engaged in practice or not. |
| 2 | The audit committee of the company or the board shall, in consultation with the internal auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit. |
| Penal provisions | |
| Companies Act 2013 Chapter XXIX – Miscellaneous Section 450. Punishment where no specific penalty or punishment is provided |
|
| 450 | If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person. |
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