CA Dindayal Dhandaria, B. Com.(Hons.), F.C.A.
Under the existing provisions of the Companies Act, 1956, the appointment or re-appointment of a statutory auditor of a Company is an annual exercise except in cases of the appointment of first auditor or appointments to fill up casual vacancies. Sub-section (1) of section 139 of the Companies Bill, 2012 proposes to make it mandatory to appoint an auditor for five years at a time (subject to annual ratification). It does not debar a company from re-appointing the same auditor for another term of five years and so on. So, it seems to be a case of a change in procedure for appointment or re-appointment of an auditor. But, the case of auditors of listed and some other prescribed companies are not same.
Sub-section (2) of section 139 of the Companies Bill, 2012 provides that 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 one term of five consecutive years; and an audit firm as auditor for more than two terms of five consecutive years. The first proviso to this sub-section expressly provides that (1) an individual auditor who has completed his term under section (a) of this sub-section shall not be eligible for re-appointment as auditor in the same company for five years from the completion of his term; and (2) an audit firm which has completed its term under section (b) of this sub-section shall not be eligible for re-appointment as auditor in the same company for five years from the completion of such term.
Thus, sub-section (2) of section 139 of the Companies Bill, 2012 ensures that a listed company or a company belonging to such class or classes of companies as may be prescribed shall not appoint or re-appoint an auditor for more than the prescribed period. Such prescribed period in case of an individual auditor is five years and in case of a firm is two terms of five years.
The third proviso to sub-section (2) of section 139 of the Companies Bill, 2012 provides that every company, existing on or before the commencement of this Act which is required to comply with provisions of this sub-section, shall comply with the requirements of this sub-section within three years from the date of commencement of this Act:
It seems that the above-stated third proviso grants a breather period of three years for listed companies (and such other companies as may be prescribed) to comply with the requirements of this sub-section.
At this stage, it is necessary to consider the requirements of the above sub-section which are to be complied with by a listed or a prescribed company. Sub-section (2), in the first instance, requires that an individual auditor should be appointed or re-appointed for a term of five years and a firm of auditor for two terms of five years. This sub-section nowhere contemplates that an existing auditor of a listed or a prescribed company shall not be appointed or re-appointed. It is only the first proviso to sub-section (2) which debars a listed or a prescribed company from appointing or re-appointing the same auditor after completion of his term.
So, one has to examine what is the “term” of an auditor contemplated in the first proviso to sub-section (2) of section 139. This proviso expressly provides that the term should be one which the auditor has completed under the provisions of clauses (a) or (b), as the case may be. The proviso reads as under:
“Provided that—
(i) an individual auditor who has completed his term under clause (a) shall not be eligible for re-appointment as auditor in the same company for five years from the completion of his term;
(ii) an audit firm which has completed its term under clause (b), shall not be eligible for re-appointment as auditor in the same company for five years from the completion of such term: “
[emphasis supplied]
It would be far-fetched to argue that an existing auditor of a listed or a prescribed company completed his term of appointment under clause (a) or (b) of sub-section (2) of section 139 without having been appointed or re-appointed after the impugned provisions come into effect.
So, a listed or a prescribed company is, in the first instance, required to appoint an existing auditor (within a period of three years as per third proviso) in compliance with the provisions of clause (a) or (b) of sub-section (2) of section 139 and thereafter, to comply with the first proviso by not re-appointing him after completion of his term. In this way, an individual auditor can continue to be an auditor of a listed or a prescribed company for 8 years and a firm of auditors for 13 years.
Conclusion:
From a careful examination of the aforesaid provisions, it can be argued that the total breather period in case of an individual auditor would be 8 years and in case of a firm of auditors – 13 years, as explained hereinabove. .
Dear Shri Dhandaria,
Thanks for this article and even I was of the same view. But do you hold the same view after the draft rules have come in ? Draft rules do say, the auditors previous engagement must be considered and in fact draft rules do prescribe the chart of number of years of eligibility remaining.
Please respond with your considered view.