[Opinion] RoC Penalizes Company and CEO for Non-appointment of an Internal Auditor

Prof R Balakrishnan – [2023] 149 taxmann.com 226 (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.

1.1 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.

2. Provisions under the Companies Act 2013 governing the Internal Audit

The Companies Act 2013 vide its section 138(1) has a provision stating that such class or classes of companies as may be prescribed shall be required to appoint an internal auditor, who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct an internal audit of the functions and activities of the company. The relevant section is reproduced from the Companies Act for ready reference.

2.1 Section 138(1) of the Companies Act 2013 spells out that “Such class or classes of companies as may be prescribed shall be required to appoint an internal auditor, who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct an internal audit of the functions and activities of the company.” Rule 13 of Companies (Accounts) Rules 2014, spells out the class of companies which are required to appoint an internal auditor.

The SEBI (Listing Obligation and Disclosure Requirements) Regulations 2015, which are monitored through stock exchanges by the Security Exchange Board of India for listed companies, has entrusted great responsibility to the audit committee. The committee is responsible to the board for overseeing management reporting on internal controls, and the auditor plays a significant role in assessing and risk management reporting based on the following pillars of corporate governance.

M/s. Indu Nissan Oxo Chemical Industries Limited being a listed entity is not only governed by the provisions of the Companies Act 2013 but also by LODR regulations.

3. Companies requiring to appoint an internal auditor

According to Rule 13 of The Companies (Accounts) Rules, 2014, the following class or classes of companies shall be required to appoint an internal auditor or firm of internal auditors, namely:

(a) every listed company;

(b) every unlisted public company having-

(i) paid up share capital of 50 crore rupees or more during the preceding financial year; or

(ii) turnover of 200 crore rupees or more during the preceding financial year; or

(iii) outstanding loans or borrowings from banks or public financial institutions exceeding 100crore rupees or more at any point of time during the preceding financial year; or

(iv) outstanding deposits of 25 crore rupees or more at any point of time during the preceding financial year; and

(c) every private company having-

(i) turnover of 200 crore rupees or more during the preceding financial year; or

(ii) outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year.

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