Can a Company Secretary in employment be the Internal Auditor of the Company?

INTERNAL AUDITOR APPLICABILITY:

SECTION 138 OF THE COMPANIES ACT, 2013

138. (1) 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 internal audit of the functions and activities of the company.

Rule 13 the companies (accounts) rules 2014 –

Companies Required to Appoint Internal Auditor

(1) The following class of companies shall be required to appoint an internal auditor which may be either an individual or a partnership firm or a body corporate, namely:-

(a) every listed company;

(b) every unlisted public company having-

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

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

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

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

(c) every private company having-

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

or

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

Provided that an existing company covered under any of the above criteria shall comply with the requirements of section 138 and this rule within six months of commencement of such section.

Explanation.- For the purposes of this rule –

(i) the internal auditor may or 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

NOTE: Section 144(b) prohibits internal audit service to be provided by Statutory Auditor of the Company.

203 (3) A whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary company at the same time:

The Principle Of ‘Ejusdem Generis'

Meaning
'Ejusdem Generis' is a Latin term and the meaning of it is "of the same kind and nature".
According to the Black's Law Dictionary (8th edition, 2004.), "the principle of Ejusdem Generis is where general words follow an enumeration of persons or things by particular and specific words. Not only these general words are construed but also held as applying only to persons or things of the same general kind as those specificallyenumerated."

This doctrine is also called Lord Tenterden's Rule, which is an ancient doctrine. The Doctrine of Ejusdem Generis provides that when a list of specific words are being followed by the general words, the general words are interpreted in a way so as to restrict them to include the items or things which will be of the same type as those of the specific words.

• CONCLUSION:

1. Rule 13 Analysis: This rule apparently allows for the appointment of an internal auditor who can be an employee of the company.

2. Section 203 Prohibition: It appears that according to this section, the prohibition against a Company Secretary serving as an internal auditor applies only when there is more than one company involved.

3. Principle of Ejusdem Generis: This principle suggests that when a general term follows a list of specific terms, the general term is interpreted to include only things of the same kind as those specifically mentioned. So, according to your interpretation, since the internal auditor can be a chartered accountant, cost accountant, or "such other professional" as decided by the board, a Company Secretary could fall under the umbrella of "such other professional".

Therefore, by incorporating the principle of Ejusdem Generis, it can be concluded that a Company Secretary can serve as an internal auditor within the company.

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-From the desk of CS Sharath