Appointment of internal auditor

This query is : Resolved

Aravind Maddipati (Querist)
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07 February 2018 If A is a statutory auditor of a company named X, can he act as an internal auditor of company Y which is an associate company of X.

Please quote the corresponding section of the act to your opinion

ND (Expert)
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07 February 2018 Please refer Section 144 of The Companies Act,2013. A statutory auditor can not do internal audit of a holding and subsidiary company of the company of which he is the statutory auditor.

Aravind Maddipati

Aravind Maddipati (Querist)
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07 February 2018 Here my query is regarding associate company which is not mentioned in section 144

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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14 July 2024 According to the provisions of the Companies Act, 2013, specifically under Section 144, which deals with the eligibility, qualifications, and disqualifications of auditors, the scenario where A acts as the statutory auditor of Company X and also wants to act as the internal auditor of Company Y (an associate company of X) needs careful consideration.

### Relevant Sections of the Companies Act, 2013:

1. **Section 144(3):** This section lays down the conditions under which a person shall not be eligible for appointment as an auditor of a company if such person, or his/her relative or partner:
- Is holding any security of or interest in the company or its subsidiary, or its holding or associate company or a subsidiary of such holding company.

2. **Section 144(11):** This section specifies that an auditor appointed under Section 139 (which includes statutory auditors) shall not be eligible to be appointed for more than one term of five consecutive years.

### Internal Auditor and Statutory Auditor Relationship:

- **Independence Issue:** The independence of the statutory auditor (A) of Company X may be compromised if the same auditor or audit firm acts as the internal auditor of Company Y (an associate of X). Internal auditors are responsible for providing independent and objective assurance to the management and board.

- **Conflict of Interest:** Acting as the internal auditor of an associate company (Y) while being the statutory auditor of Company X could potentially create a conflict of interest situation. This conflict could impair the auditor’s objectivity and independence, which are crucial for both statutory and internal audit functions.

### Conclusion:

Based on the principles of independence and the provisions outlined in Section 144 of the Companies Act, 2013, it is generally advisable that the same auditor or audit firm should not act as the internal auditor of an associate company (Y) if they are already the statutory auditor of Company X. This is to maintain the integrity of the audit process and avoid any perceived or actual conflicts of interest.

Therefore, in this scenario, it would be prudent for Company Y to appoint a different auditor or audit firm as its internal auditor to ensure compliance with regulatory requirements and best practices in corporate governance.

If you need further clarification or have specific circumstances that require detailed analysis, consulting with a legal expert or professional advisor specializing in corporate law and auditing would be beneficial.

Best regards,