The failure to appoint Internal Auditor has once again attracted strict regulatory action from the Ministry of Corporate Affairs (MCA). In a recent adjudication order, the Registrar of Companies (ROC) imposed a total penalty of ₹2.5 lakh on a private limited company and its director for non-compliance with Section 138 of the Companies Act, 2013. The order highlights the MCA’s increasingly firm stance on internal audit compliance and corporate governance failures.
Background of the MCA Failure to appoint Internal Auditor Penalty Order
The case relates to a private limited company that was statutorily required to appoint an Internal Auditor but failed to do so within the prescribed timeframe. Although the company eventually appointed the Internal Auditor, the appointment was made after a prolonged delay, resulting in regulatory scrutiny.
The Registrar held the company and its officer in default liable for non-compliance for the period from 1 April 2022 to 14 November 2024, amounting to 958 days of continuous default. This prolonged failure to appoint Internal Auditor triggered penalties under the Companies Act.
Legal Provisions Governing Internal Auditor Appointment
Under Section 138 of the Companies Act, 2013, certain classes of companies are mandatorily required to appoint an Internal Auditor. This requirement is further detailed under Rule 13(1)(c) of the Companies (Accounts) Rules, 2014, which specifies the categories of companies covered.
The objective of mandating internal audit is to strengthen internal controls, risk management systems, and governance mechanisms. Non-compliance with Failure to appoint Internal Auditor these provisions is treated seriously, as it directly impacts transparency and financial discipline.
Why the MCA Imposed the Penalty
The MCA observed that the company failed to comply with statutory requirements for a significant period. Even though the Internal Auditor was eventually appointed, the delay did not absolve the company from liability. The Registrar clearly stated that post-facto compliance does not eliminate penalties for the period of default.
The adjudicating authority held both:
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The company, and
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The director as “officer in default”
liable under the Companies Act. This reinforces the principle that directors cannot escape responsibility for governance lapses.
Quantum of Penalty Imposed
The MCA imposed an aggregate penalty of ₹2.5 lakh, distributed between the company and its director, in accordance with statutory limits. The calculation considered the duration of default, statutory provisions, and the nature of non-compliance.
This order serves as a strong reminder that failure to appoint Internal Auditor is not viewed as a procedural lapse but as a substantive violation affecting corporate oversight.
Key Compliance Lessons for Companies
This order carries important lessons for companies alike. Internal audit compliance is no longer an area where regulators show leniency, especially when defaults extend over long periods.
Companies should note that:
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Appointment of Internal Auditor must be timely, not merely eventual
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Directors are personally accountable as officers in default
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Long-standing non-compliance significantly increases penalty exposure
Growing Regulatory Focus on Governance
The MCA has consistently intensified enforcement actions relating to governance and audit-related provisions. Orders involving internal audit non-compliance, delayed filings, and auditor appointments are becoming increasingly common.
This trend signals that regulators expect companies to maintain robust compliance frameworks and treat internal audit as a core governance function rather than a formality.
The MCA’s decision to impose a ₹2.5 lakh penalty for failure to appoint Internal Auditor underscores the importance of strict adherence to Section 138 of the Companies Act. Companies and directors must ensure timely compliance to avoid penalties, reputational damage, and regulatory scrutiny. Internal audit is not optional—it is a statutory safeguard for corporate accountability.
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