Companies law Appointment of CS

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Viral chopra (Querist)
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08 May 2025 Does the appointment of a Whole-Time Company Secretary (KMP) as an Internal Auditor under Section 138 of the Companies Act, 2013, violate the independence and objectivity principles mandated for internal audits, considering their dual role under Secretarial Standard-2 and SEBI (LODR) Regulations for listed entities?

Asha Kanta Sharma online

Asha Kanta Sharma online

(Expert)
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12 August 2025 1. Section 138 of Companies Act, 2013
Section 138 mandates the appointment of an Internal Auditor for certain classes of companies to audit internal control systems regarding the purchase of inventory, fixed assets, and sale of goods or services.

The Act does not explicitly restrict the internal auditor to be an independent person external to the company.

However, independence and objectivity are fundamental principles of internal auditing.

2. Role of Whole-Time Company Secretary (KMP)
A Whole-Time Company Secretary is a Key Managerial Personnel (KMP) under Section 2(51) of the Companies Act, 2013.

Their duties as per Secretarial Standard-2 (SS-2) and SEBI (LODR) Regulations include ensuring compliance, corporate governance, and facilitating board procedures.

The CS plays a compliance and governance role, which requires impartiality but involves operational involvement.

3. Potential Conflict of Interest and Independence Issue
Internal Auditor’s role requires an objective assessment of internal controls, risk management, and compliance processes.

If the same person (Whole-Time CS) performs internal audit functions, there can be conflict of interest or compromised independence, because:

The CS may have been involved in designing or executing the very processes they are supposed to audit.

Objectivity may be impaired since the CS is also responsible for compliance and governance monitoring.

4. Secretarial Standard-2 (SS-2)
SS-2 emphasizes the role of CS as a key officer ensuring governance and compliance.

It does not specifically permit or prohibit CS acting as Internal Auditor.

However, best practice and governance principles encourage segregation of duties to maintain checks and balances.

5. SEBI (LODR) Regulations for Listed Companies
SEBI LODR requires listed companies to have a robust internal audit system.

The internal auditor must be independent and objective.

Usually, listed companies appoint external/internal audit firms or individuals independent from KMPs.

Appointment of Whole-Time CS as internal auditor may raise red flags on audit independence in SEBI’s view.

6. Practical and Regulatory Perspective
Appointment of Whole-Time CS as Internal Auditor is generally discouraged due to:

Independence concerns.

Potential violation of principles of segregation of duties.

Best practice is to appoint a separate Internal Auditor or audit firm with no overlapping KMP functions.

If unavoidable (say for a small company), ensure adequate disclosures and maintain transparency.

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