1.32     Query

Appointment of a firm as internal auditors of a bank where a partner

of the firm is a guarantor of a loan exceeding Rs. 1000.

1. A nationalised bank has appointed a firm of chartered accountants for internal audit/inspection of their certain branches. One of the partners of that firm is involved as guarantor in respect of a loan exceeding Rs. 1000/- disbursed by one of the branches of that bank.

2. The querist has sought the opinion of the Expert Advisory Committee on the following issues arising from above:

(i) Whether in such a situation the internal audit/inspection can be accepted.

(ii) Whether it can be accepted of any branch other than that particular branch from which the loan has been disbursed.

(iii) If said appointment can be accepted whether it will be necessary to disclose the above facts. If yes, in what manner (i.e. in respect of each branch or the bank once for all).

                                                    Opinion                                                         October 10, 1988

1. The Committee notes that Section 226(3) (d) disqualifies, for appointment as statutory auditor of a company, a person who is indebted to the company for an amount exceeding one thousand rupees, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding one thousand rupees. This disqualification is applicable in the case of an appointment as statutory auditor only. In other words, a person who is indebted to the company for an amount exceeding one thousand rupees, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding one thousand rupees, can accept appointment in a capacity other than as statutory auditor. Thus, he can accept appointment to perform internal audit/inspection of certain branches of a bank even if he or his firm or any other partner in his firm has given guarantee to the bank in respect of a loan exceeding rupees one thousand.  It is immaterial whether the guarantee has been given in respect of a loan disbursed by the branch of which he is proposed to be appointed as internal auditor/inspector or by some other branch. In view of this, the opinion of the Committee on the issues raised by the querist in para 2 of the query, is as below:

           (i) Yes, the internal audit/inspection assignment can be accepted by the firm.

(ii) Yes, the internal audit/inspection assignment can pertain to any branch of the bank. However, the Committee wishes to emphasise that, before accepting appointment, the querist should ensure that in the circumstances of the case, it would be possible to conduct the audit in an independent and objective manner.

(iii) There is no legal requirement for disclosure of the fact of having given the guarantee.

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