[aaykarbhavan] SEBI VIEWS ON INTERNAL AUDIT

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c. Role of internal auditor of the company

Clause 49 of the listing agreement requires the audit committee to review with the 

management, the performance of statutory and internal auditors, and the adequacy 

of the internal audit function, if any, including the structure of the internal audit 

department, staffing and seniority of the official heading the department, reporting 

structure coverage, frequency of internal audit. The Audit Committee is also required 

to review the internal audit reports relating to internal control weaknesses and 

discuss the significant findings of the audit with the internal auditors and follow up 

there on. 

The present norms also specify that the appointment, removal and terms of 

remuneration of the Chief internal auditor are subject to review by the Audit 

Committee. 

The recently witnessed accounting irregularities at Satyam Computer Services Ltd., 

re-iterates the need for having greater internal checks and controls in an 

organisation. However, the mere existence of robust internal checks and controls 

may not suffice the purpose of having an internal review mechanism. It is also 

pertinent that such an internal control mechanism is able to discharge its 

responsibility independently without any restrictions from or fear of the management. 

It must also be able to evaluate the business processes and procedures rationally 

and assess the adequacy and effectiveness of the internal controls to ensure optimal 

levels of productivity. 

In order to ensure that such internal control systems are truly independent and carry 

out their function without any influence from the management, it was proposed by 

SEBI to the SCODA that in the case of listed companies, the function of internal 

audit may be mandatorily carried out by an external audit firm. 

The SCODA deliberated on the proposal and discussed the advantages and disadvantages in the same. The Committee agreed that commissioning the internal 

audit in-house may ensure that the internal auditor has a detailed insight on the 

business of the organisation. However, it was also felt that such a practice would be 

more convenient for larger organizations with offices spread across various locations 

who can also afford to appoint a fulltime in house internal auditor. On the other hand, 

it was noted that an external audit firm being an internal auditor would ensure 

greater independence of the internal audit function. 

After deliberations on the proposal, the Committee was of the view that the current 

mechanism laid down under Clause 49 of the Listing Agreement wherein Audit 

Committee is given the responsibility to review the performance of internal auditor 

was sufficient and provides adequate checks and balances as far as internal control 

mechanisms are concerned. Therefore, the Committee recommended that it would 

not be prudent to mandate that the internal audit function may be carried out by an 

external audit firm. 

Views of the public are solicited on the aforesaid issue. 

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