Section 138 of the Companies Act, 2013 grants the board of directors of the company to select any qualified professional as internal auditors, based on the experiences and skills it deems necessary and the professional so selected may or may not be an employee of the company.

So, a company secretary employed directly by the organization, or a practicing company secretary engaged by the organization, can serve as the internal auditor of the company.

The major advantage of employing a Company secretary as internal auditor is in the fact that, they have a better understanding of the foundational document that dictates the manner in which the affairs of the company have to be conducted – The Companies Act, 2013 along with all the rules. This, along with their inherent understanding of labour laws, SEBI regulations and the organization’s inner workings, they are uniquely equipped to oversee the very heartbeat of the company – Internal audit.

Wisdom behind the appointment of CS as internal auditors:

Risk and Compliance Management – as company secretaries are well versed in the compliance aspects of a given company, they can play an effective role in day-to-day compliance management of the company providing immense value.

Evaluation of Internal Controls – as an expert in compliances, any lapses can be easily detected and consequently, the internal control failure that has led to the lapse in the first place is more likely to be found by a company secretary.

Detection and Prevention of Fraud – fraud is the result of breakdown of internal checks and balances OR accumulation of too much power in a single person. As a part of evaluation of internal controls, this can be a task that is well within the comfort of a company secretary.

Is appointing internal auditor mandatory?

Private companies with turnover of 200 Crores or above OR borrowing of 100 Crores or above need to appoint internal auditors apart from large public companies and listed companies.

The appointment of a Company Secretary is mandatory for all companies with a paid-up capital of 10 Crores or more, as well as for listed companies. Additionally, since the internal auditor may be an employee of the company, this provides an opportunity for companies to assign the responsibilities of internal audit to the Company Secretary, who already happens to be an employee.

In summary, designating a company secretary as the internal auditor is more appropriate for organizations that prioritize enhancing their compliance and governance. Both roles are fundamentally centred on the compliance and governance dimensions of the organization, thereby complementing each other effectively.