Ministry of Corporate affairs imposed fines for failure in appointing Internal Auditor

Ministry of Corporate Affairs (“MCA”) imposed INR 3,00,000 fine for violating the Companies Act 2013 w.r.t. failure to appoint Internal Auditor.

Summary of the Case:

MCA has ordered an Inquiry to a Company under sec. 206(4) of the Act. During the course of the examination of the Financial Statements for the FY 2018-2019, the Inquiry Officer (“Officer”) has pointed out that the Turnover of the Company exceeded INR 200 crore, however, the Company has not appointed Internal Auditor. This resulted in violation, of the provisions of Section 138 of the Act read with Rule 13 of the Companies (Accounts) Rules, 2014 (“Rules”), by the Company & its Officers.

The authorized Representative of the Company claimed that Company had constituted an in-house Internal Audit Department commensurate with the size of the company and not appointed an external professional as the internal auditor of the company. Further, the Board of Directors’ Reports for the FY 2014-2015, 2015-2016, 2016-2017, 2017-2018, 2018-2019 & 2019-2020 have reported regarding the adequacy of Internal Control with reference to Financial Statements. Hence, there is no violation of Section 138 of the Act w.r.t. appointment of Internal Auditor.

The Adjudicating Officer, found the explanation received from the Company unsatisfactory, as the company is required to appoint an internal auditor from 2014-2015.

As a consequence of the Violation, the Adjudicating Officer imposed a penalty of INR 3,00,000 (“Order”) on the Company & its directors were directed individually to remit the penalty within 90 days from the date of the order. Further, in case of failure to pay the penalty within a period of 90 days, officers of the company in default shall be punishable with:

1. imprisonment which may extend to six months, or
2. fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or
3. both

We at MBG Corporate Services are assisting companies to ensure compliance by conducting Internal Audit reviews under our Risk Advisory domain.

Source: Order No. ROC-Guj/Adj. Order/Sec. 138/2023/1676 to 80 Dated: 4 JUL 2023 ORDER FOR PENALTY UNDER SECTION 454 OF THE COMPANIES ACT, 2013 READ WITH COMPANIES (ADJUDICATION OF PENALTIES) RULES, 2014 FOR VIOLATION OF SECTION 138 OF THE COMPANIES ACT, 2013.

Last updated: 21/08/2023

Article contributed by:

Risk and Transaction Advisory department

MBG Corporate Services