All you need to know about appointment and vacancy of Auditors

Audits are extremely important as it provides credibility to a set of financial statements and gives the shareholders confidence that the accounts are true and fair. It can also help to improve a company’s internal controls and systems.

Large business corporations are managed by directors who represent the members who are the real owners of the company. In the absence of any check, then directors may mismanage the finances of the company. Thus members appoint auditor to look into the true and fair view of the financial affairs of the company. These auditors are independent from the company and hence can express an un-biased opinion.

Various provisions pertaining to auditors are covered under the Companies Act, 2013. Let us understand these provisions in detail.

How shall Appointment of auditors take place according to the Companies Act?

• Section 139 of the Companies Act pertains to Appointment of auditors
• Every company shall, at the first annual general meeting (AGM), appoint an individual/firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its 6^th annual general meeting and thereafter till the conclusion of every 6^th meeting.
• The manner and procedure of selection of auditors by the members of the company at such meeting shall be such as may be prescribed
• The company shall place the matter relating to such appointment for ratification by members at every annual general meeting
• Before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor
• The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141
• The company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar within 15 days of the meeting in which the auditor is appointed.

For how long can an auditor be appointed in a company?

 No listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint or re-appoint:-

• an individual as auditor for more than 1 term of 5 consecutive years and
• an audit firm as auditor for more than 2 terms of 5 consecutive years

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What will be the effect is the tenure mentioned above is over?

• An individual auditor who has completed his term (1 term of 5 years) shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of his term.
• An audit firm which has completed its term (2 terms of 5 years), shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of such term
• As on the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for 5 years

 Subject to the provisions of this Act, members of a company may resolve to provide that—

• in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members; or
• the audit shall be conducted by more than one auditor

Who shall appoint an auditor of a Government Company?

The Comptroller and Auditor-General (CAG) of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies, within 180 days from the commencement of the financial year, who shall hold office till the conclusion of the AGM in case of a:-

• Government company or
• any other company owned or controlled, directly or indirectly, by the
• Central Government
• any State Government or Governments
• partly by the Central Government and partly by one or more State Governments

Who shall appoint the first auditor of a company, other than a Government company?

• The first auditor of a company, other than a Government company, shall be appointed by the Board of Directors (BOD) within 30 days from the date of registration of the company.
• In case of failure of the BOD to appoint such auditor, it shall inform the members of the company.
• Then the members shall within 90 days at an extraordinary general meeting appoint such auditor and such auditor shall hold office till the conclusion of the first AGM.

Who shall appoint the first auditor of a Government company?

• The first auditor shall be appointed by the CAG of India within 60 days from the date of registration of the company.
• In case the CAG of India does not appoint such auditor within the said period, the BOD of the company shall appoint such auditor within the next 30 days
• In the case of failure of the BOD to appoint such auditor within the next 30 days, it shall inform the members of the company who shall appoint such auditor within the 60 days at an extraordinary general meeting, who shall hold office till the conclusion of the first annual general meeting.

How shall a casual vacancy of an auditor be filled?

Any casual vacancy in the office of an auditor shall be filled as follows:-

Type of Company	Casual Vacancy to be filled by
A company other than a company whose accounts are subject to audit by an auditor appointed by the CAG	Board of Directors within 30 days
A company whose accounts are subject to audit by an auditor appointed by the CAG	CAG within 30 days In case the CAG does not fill the vacancy within the said period, the BOD shall fill the vacancy within next 30 days

If such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within 3 months of the recommendation of the Board and he shall hold the office till the conclusion of the next AGM (in case of a company other than a company whose accounts are subject to audit by an auditor appointed by the CAG)

Can a retiring auditor be re-appointed?

A retiring auditor may be re-appointed at an AGM, if—

• he is not disqualified for re-appointment
• he has not given the company a notice in writing of his unwillingness to be re-appointed and
• a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed.

What are the qualifications of a company auditor?

• Section 141 of the Companies Act pertains to eligibility, qualifications and disqualifications of auditors.
• A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant.
• A firm whereof majority of partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company.
• Where a firm including a limited liability partnership is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm.

Who shall not be eligible to be appointed as an auditor?

Where a person appointed as an auditor of a company incurs any of the disqualifications mentioned below after his appointment, he shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor.

The following persons shall not be eligible for appointment as an auditor of a company, namely:-

• a body corporate other than a LLP registered under the Limited Liability Partnership Act, 2008
• an officer or employee of the company
• a person who is a partner, or who is in the employment, of an officer or employee of the company
• a person who, or his relative or partner:-
• is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company (the relative may hold security or interest in the company of face value not exceeding Rs 1000)

• is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of such amount as may be prescribed or
• has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, for such amount as may be prescribed
• a person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed
• a person whose relative is a director or is in the employment of the company as a director or key managerial personnel
• a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than 20 companies
• a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction
• any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialized services as provided in section 144.

Can an auditor resign from a company?

Yes, an auditor can resign from a company. They can resign after giving the notice to company fulfilling all the conditions as covered under their terms of appointment letter at the time of their appointment. An auditor must also inform the reasons for the resignation to the ROC.

What is the procedure for auditor’s resignation?

The procedure for an auditor’s resignation must be followed in the below mentioned process:-

• The auditor has to submit the resignation letter and Form ADT3 to the company. This statement shall be sent to the ROC within 30 days from the date of the resignation.
• A board of meeting shall be organized with all the directors for effecting the resignation.
• The company shall obtain a consent letter from the new auditor firm under section 139 and 141, Companies Act 2013.
• A board of meeting shall be called. All the members of the company shall be called in the meeting for filling the vacancy of the auditor.
• The proposed Auditor/Auditors’ Firm is to be appointed in such meeting held.
• Intimate the Appointed auditor/ Auditors’ firm regarding the date of appointment.

The auditor has to state the following in the E-form ADT-3:

• Name of the auditor’s firm.
• Address of the resigning auditor firm
• Email address of the auditor firm
• Resigning auditor firm’s contact numbers.
• Permanent account number of the auditor firm
• The date of resignation will be the date written in the resignation letter.
• The auditor has to state the exact reasons for resigning. These are written in the resignation letter as well as the form ADT-3.
• Other facts relevant to resignation can be anything which is necessary for the company as well as the ROC to know with regard to the resignation.
• Since this form is a declaration by the auditor, therefore has to be signed by the auditor only.

What is company fails to appoint auditor of company within prescribed time?

As per section 147 of The Companies Act, 2013, following the penal action to be taken by department:-

• The company shall be punishable with fine which shall not be less than Rs 25,000 but which may extend to Rs 5,00,000
• Every officer of the company who is in default shall be punishable with imprisonment which may extend to 1 year or with fine which shall not be less than Rs 10,000 but which may extend to Rs 1,00,000 or with both.
• If an auditor of a company contravenes any of the provisions the auditor shall be punishable with fine which shall not be less than Rs 25,000 but which may extend to Rs 5,00,000 or 4 times the remuneration of the auditor, whichever is less.

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