MCA penalty for not appointing an Internal Auditor: case summary and takeaways

Ministry of Corporate Affairs (MCA) imposed a penalty of ₹3,00,000 for violation of the Companies Act, 2013 due to failure to appoint an Internal Auditor.

Summary of the case

An inquiry under Section 206(4) noted that the company’s turnover exceeded ₹200 crore in FY 2018–19, yet no Internal Auditor was appointed. This was held to be a violation of Section 138 read with Rule 13 of the Companies (Accounts) Rules, 2014.

Company’s submission

The company argued that it had an in-house internal audit department commensurate with its size and that its Board’s Reports (FY 2014–15 to FY 2019–20) stated adequacy of internal controls with reference to financial statements, asserting there was no violation regarding appointment.

Adjudicating Officer’s finding

The explanation was deemed unsatisfactory. The company was required to appoint an Internal Auditor from 2014–15 based on applicability thresholds; non-appointment constituted non-compliance.

Penalty and compliance directions

A penalty of ₹3,00,000 was imposed on the company. Directors were directed to remit the penalty within 90 days. In case of non-payment, officers in default may face prosecution with imprisonment up to six months, or fine ranging from ₹25,000 to ₹1,00,000, or both.

Practical takeaways

• Confirm Section 138 applicability annually based on class, turnover, borrowings, and other thresholds; minute the assessment and board decision.
• Appointment is a formal requirement; having an in-house review team does not substitute for appointing an Internal Auditor under the Act.
• Document board resolution, engagement letter/appointment, auditor scope and independence, and place the status in the Board’s Report.
• Where thresholds are crossed mid-year, act promptly; avoid prolonged gaps between applicability and appointment.

Related Support: MBG Corporate Services

For scope and approach to internal audits, see what internal audit is and how it works. For applicability context and relevance in the current environment, refer to applicability and relevance of internal audit. For assistance with compliance and audit planning, explore Internal Audit services.

Source and contributor

Source: Order No. ROC-Guj/Adj. Order/Sec. 138/2023/1676 to 80 dated 4 July 2023 under Section 454 of the Companies Act, 2013 read with Companies (Adjudication of Penalties) Rules, 2014.

Last updated: 21/08/2023

Article contributed by: Risk & Transaction Advisory | MBG Corporate Services