“Can a promoter’s family member be appointed in Internal Audit Department?”
This innocuous sounding questions had created a surge of activities in a forum.
Legal perspective:
In case of a family member of a Promoter appointed to a place of profit, it requires shareholders’ approval by special resolution and disclosure in related party disclosure.
In case the remuneration is beyond a threshold, it needs approval of government.
There is no prohibition in law. (There is a prohibition for external auditor)
Promoter: A person or a group of person and entities who have formed the organization and running it.
Place of profit: Any employment with organization which requires a payment.
IPPF Perspective:
Standard 1120 – Individual Objectivity
Internal auditors must have an impartial, unbiased attitude and avoid any conflict of
interest.
Interpretation:
Conflict of interest is a situation in which an internal auditor, who is in a position of trust, has a competing professional or personal interest. Such competing interests can make it difficult to fulfill his or her duties impartially. A conflict of interest exists even if no unethical or improper act results. A conflict of interest can create an appearance of impropriety that can undermine confidence in the internal auditor, the internal audit activity, and the profession. A conflict of interest could impair an individual’s ability to perform his or her duties and responsibilities objectively.
E.g. Typical situations that could undermine objectivity, such as auditing in an area in
where an internal auditor recently worked; auditing a family member or a close friend.
Independence: The freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner.
Pros of appointing a family member in IAD:
- An excellent way to give exposure and training.
- An exposure in Internal Audit Department may lead to better appreciation of internal controls and discouraging of management bypass of internal controls.
- Department may get lots of authority
- Nobody will refuse information
- People will stop playing games with department.
Cons of appointing a family member in IAD:
- People will avoid IA team.
- IAD will be feared as a Police dept.
- CAE may lose authority
- CAE may lose communication opportunity up the line, as person can tell everything at any time.
- Independence can be at stake.
- Independence can be compromised or at least it will seem to be compromised
- Presence of Promoter’s family member will influence CAE action.
Some Balanced Thoughts:
- How may Audit reports have implicated board or promoters. Situation will become complex when such scenario arises.
- In case of listed company, if an accounting gap has been found. Will it be reported?
- Presence of family member of promoter will not make any difference to CAE’s own ethical standing.
- CAE will decide work allocation; hence CAE can manage the downside of promoter in IAD.
- IA is a trusted location for giving an overview of organization to new blood
- IA is under watch by senior blood
- IA is a parking place for a relative who is not welcome in the business. (This show IA position in the organization.
Independence:
Having a family member as an internal auditor have implication on independence, especially in case of listed companies, where it will be considered as conflict of interest for internal audit.
I am not able to find references where law forbids appointment of promoter’s family member as internal auditors.
In some groups this question has been raised and received responses.
Can a relative of a director appointed as an auditor??
Read comments at: https://www.caclubindia.com/forum/can-a-relative-of-a-director-appointed-as-an-auditor–51394.asp
Whether brother of director’s wife can be appointed as auditor of the company.
Read comments at: https://www.knowledgebible.com/forum/showthread.php/703-Whether-brother-of-director%E2%80%99s-wife-can-be-appointed-as-auditor-of-the-company
Call for action:
Inputs/ comments/ suggestion: I welcome inputs/ comments / suggestions from readers on how to approach this issue. Feel free to correct me, educate me.
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(Disclaimer: The views expressed constitute the opinion of the author and the author alone; they do not represent the views and opinions of the author ’s employers, supervisors, nor do they represent the view of organizations, businesses or institutions the author is, or has been a part of.)
