Appointment of Auditor under Companies Act, 2013

Gurminder Dhami

INTRODUCTION

The Companies Act, 2013 has changed the rules of the game. There has been a paradigm shift in the provisions relating to appointment of Statutory Auditors. In this article I have tried to cover all aspects relating to appointment of auditor, however in this article I have not covered appointment of auditor by Government Companies or Companies owned or controlled, directly or indirectly by Central or State Government.

In this article, unless otherwise expressly provided all sections referred to are of Companies Act, 2013 and rules referred to are of Companies (Audit and Auditor) rules, 2014.

APPOINTMENT OF FIRST AUDITOR

As per section 139(6) the first auditor of the company shall be appointed by the Board within 30 days of Incorporation. In case of Board’s failure, an EGM shall be called within 90 days to appoint the first auditor. The law is silent regarding from when this time limit of 90 days be reckoned, it is better to take a stricter view and interpret that the 90 days limit starts from Incorporation rather than expiry of 30 days(i.e. failure of Board) from it.

Tenure: – Till conclusion of 1^st annual general meeting.

Remuneration: – As per proviso to section 142(1) remuneration of the first auditor can be decided by the Board.

Does appointment of 1^st auditor require obtaining written consent, certificate and filing of form ADT-1 ?

The appointment of first auditor is governed through section 139(6) which starts with a non-obstante clause [notwithstanding anything contained in sub-section (1)] and it is sub-section (1) which requires obtaining consent & certificate from auditor and filing of form ADT-1 with ROC.

Interpretation of “notwithstanding anything contained….”:- As per Supreme court, the non-obstante clause is used to avoid the operation and effect of all contrary provisions. In case any departure between non-obstante clause and other provisions, no-obstante clause will prevail.

Since section 139(6) does not speak anything contrary to section 139(1) as far as obtaining of consent, certificate and filing of form is concerned therefore in can be interpreted that ADT-1 should be filed with ROC for first auditor also.

Procedure for appointment of auditor

1. Intimate the proposed auditor(s) regarding the intention of appointing him/it as auditor and ask whether he/ it is eligible and not disqualified to be appointed as auditor of the company.

2. Obtain consent & certificate from auditor.

3. If audit committee required to be constituted under section 177, then obtain its recommendation (Section 139(11)).

4. Call Board meeting.

5. Approve the appointment of auditor at the first Board Meeting.

6. Intimate the auditor and file with ROC form ADT-1(to be attached in form GNL-2 as per MCA circular 09/2014 dated 25th April, 2014) within 15 days.

APPOINTMENT OF AUDITOR AT 1^ST AGM

As per section 139(1) every company shall appoint at its 1^st annual general meeting an individual or a firm as an auditor of the company who shall hold office who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting

Tenure subject to ratification :- The tenure of 5 consecutive years is subject to ratification by shareholders at every AGM.

Remuneration: – As per section 142(1) remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein.

Manner & Procedure for selection to be governed through rules :- it is prescribed in rule 3, explained hereunder,

1. Consideration of the appointment – The Board or the Audit Committee (where it is required to be constituted) shall consider the qualifications, experience of the auditor and whether the aforesaid attributes are commensurate with the size and requirements of the company. Further regard should also be given to professional matters of conduct against the proposed auditor before the ICAI, Court or any competent authority.

2. Recommendation of name for appointment of auditor – The procedure depends upon whether audit committee is required to be constituted or not.

• Constitution of audit committee required: In this case the committee shall recommend the name of the auditor to the Board which if agrees with the recommendation, will further recommend it to the members. If the Board does not so agree, then it shall refer back the recommendation to the committee which may reconsider its recommendation, however if the committee decides not to do so then the Board shall record reasons for its disagreement with the committee and send its own recommendation for consideration of the members.

• Audit Committee not required: The committee shall recommend the name of the auditor to the members.
  

Written consent and certificate from the auditor for appointment of auditor :-   As per 2^nd proviso to section 139(1) auditor has to give a written consent to become auditor of the company & a certificate stating that appointment is in accordance with conditions prescribed.

Contents of the certificate (rule 4(1) of Companies (Audit and Auditor) rules, 2014) are:-

1. The person being appointed is eligible for appointment and is not disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the rules or regulations made thereunder.

2. The proposed appointment is as per the term provided under the Act.

3. The proposed appointment is within the limits laid down by or under the authority of the Act.

4. The list of proceedings pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.

The Certificate should also state that the auditor is eligible and not disqualified for appointment as per section 141(requirement of 3rd proviso).

Intimation to Auditor & ROC :- The company shall inform the auditor regarding appointment and also file a form ADT-1 to ROC within 15 days of the meeting in which the auditor is appointed.

Procedure

1. Intimate the proposed auditor(s) regarding the intention of appointing him/it as auditor and ask for the following information and documents:-

• Qualification, experience and matters of professional conduct pending before ICAI, Court or any other competent authority.
• Consent to become auditor.
• Certificate (contents discussed above)

2. Call Board meeting for the purpose of following:-

• Considering information and documents received in point 1.
• Considering that the qualification & experience are commensurate with the size & operations of the company.
• Recommending the name of the auditor to the members.
• Calling of AGM.

3. Convene the AGM and get the Ordinary resolution appointing the auditor passed at the meeting.

4. Intimate the Auditor and file with ROC form ADT-1(to be attached in form GNL-2 as per MCA circular 09/2014 dated 25th April, 2014) within 15 days.

Note: – In case the Company is required to constitute the Audit Committee, then the work of consideration and recommendation vests with it. The concept of the same has been discussed above.

RE-APPOINTMENT OF AUDITOR

After completion of tenure of 5 consecutive years the auditor may be re-appointed by complying with the provisions of section 139(9) which states that subject to the provisions of sub-section (1) & the rules made thereunder, a retiring auditor may be re-appointed at an annual general meeting, if-

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

Does Re-APPOINTMENT or RATIFICATION of auditor at AGM require obtaining written consent, certificate and filing of form ADT-1 ?

As per 2^nd,3^rd & 4^th proviso to section 139(1) consent, certificate and filing of form is required for appointment. Since as per explanation to section 139(1) appointment includes re-appointment therefore the documentation & filing of form is also required at the time of re-appointment but Ratification does not require filing of ADT-1 but it will be a better practice if certificate of disqualification is obtained even in case of ratification.

Procedure

The procedure for re-appointment of Auditor shall more or less be same as both, appointment & re-appointment are goverened through provisions of Section 139(1). However, following additional things shall be kept in mind :-

• Provisions of section 139(9) (discussed above)
• Provisions relating to rotation of auditors(discussed later)

ROTATION OF AUDITORS

As per section 139(2) no listed company or companies as prescribed shall appoint or re-appoint :-

• An individual as auditor for more than one term of 5 consecutive years; and
• An audit firm as auditor for more than two terms of 5 consecutive years

Note: 1. Break in the term for a continuous period of 5 years will be considered as fulfillment of criteria of rotation. (explanation 2 to rule 6(3)(ii)).

2. the period for which the individual or the firm has held office as auditor prior to the commencement of the Act shall be taken into account for calculating the period of five consecutive years or ten consecutive years, as the case may be(rule 6(3)(i))

Cooling period: – 5 years from completion of tenure as said above.

Other persons who cannot be appointed as auditor:-

• Firm having a common partner 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 a period of five years (1^st proviso to section 139(2)).

• The incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms(rule 6(3)(ii)).

ü  “same network” includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control (explanation 1 to rule 6(3)(ii))

• If a partner, who is in charge of an audit firm and also certifies the financial statements of the company, retires from the said firm and joins another firm of chartered accountants, such other firm shall also be ineligible to be appointed for a period of five years.

Companies prescribed (rule 5):-

Following companies excluding one person companies and small companies:-

• Unlisted public companies having paid up capital of Rs.10 crore or more;
• Private limited companies having paid up capital of Rs. 20 crore or more;
• Companies having paid up capital less than as mentioned above, but having public borrowings from financial institutions, banks or public deposits of rupees 50 crore or more.

Note :- Rotation of auditors does not apply to dormant companies(proviso to rue 6 of Companies(Miscellaneous) rules, 2014)

Manner of rotation:- to be prescribed by way of rules(section 139(4) read with rule)

• Recommendation of name:- The procedure depends upon whether audit committee is required to be constituted or not. If constitution required then the Committee shall recommend to the Board the name of the auditor who may replace the incumbent auditor on expiry of his term. The Board shall consider the same and make its recommendation to the members. In cases where committee not required then the Board shall itself recommend to the members.
  

Transitional period:- For companies existing on commencement of this act, 3 years from such commencement (2^nd proviso to section 139(2))

SPECIAL RIGHTS TO SHAREHOLDERS

As per section 139(3) members have following rights after passing resolution in their meeting:-

• In case of audit firm, auditing partner and his team shall be rotated at such intervals as may be decided.
• Audit shall be conducted by more than auditor.

CASUAL VACANCY

As per section 139(8) any casual vacancy, shall be filled by the Board within 30 days. If the vacancy has arisen due to resignation of auditor then such appointment shall also be approved by the company at a general meeting convened within 3 months of the recommendation of the Board.

Instances of casual vacancy :-

• Death
• Resignation
• Disqualification – If an existing auditor gets disqualified under Section 141 then he shall inform the company and the situation will be treated as casual vacancy (Section 141(4))
• Failure of ratification at AGM – If the ratification resolution fails at the AGM of company then this also tantamount to casual vacancy(explanation to rule 3).

Tenure: – Till conclusion of forthcoming annual general meeting.

Remuneration: – Section 142 deals with remuneration of auditor. The section expressly empowers the shareholders to fix the remuneration except in case of 1^st auditor. The law is silent for fixing remuneration for auditor being appointed in casual vacancy, since the law being silent and going with the purposeful interpretation of law the remuneration can be decided by the Board as the appointing authority is the Board itself moreover section 224(8) of Companies Act, 1956 also enumerated the same principle. However, this shall not be the case where casual vacancy has arisen due to resignation.

Does appointment of auditor in casual vacancy require obtaining written consent, certificate and filing of ADT-1 ?

On reading section 139(8) prima facie it seems that the aforesaid is not required to be done, but since an auditor is appointed by the board in place of existing auditor the regulator (ROC) should be intimated of the same and consent, certificate should also be obtained so as to prove that board has acted diligently.

Procedure

1. Intimate the proposed auditor(s) regarding the intention of appointing him/it as auditor and ask whether he/ it is eligible and not disqualified to be appointed as auditor of the company.

2. Obtain consent & certificate from auditor.

3. If Audit Committee required to be constituted under section 177, then obtain its recommendation (Section 139(11)).

4. Call Board meeting.

5. Approve the appointment of auditor in casual vacancy at the Board meeting.

6. Intimate the Auditor and file with ROC form ADT-1(to be attached in form GNL-2 as per MCA circular 09/2014 dated 25th April, 2014) within 15 days.

Procedure – where casual vacancy arises due to resignation of existing auditor

1. Intimate the proposed auditor(s) regarding the intention of appointing him/it as auditor and ask whether he/ it is eligible and not disqualified to be appointed as auditor of the company.

2. Obtain consent & certificate from auditor.

3. If Audit Committee required to be constituted under section 177, then obtain its recommendation (Section 139(11)).

4. Call Board meeting for the purpose of following:-

• Appointment of auditor in casual vacancy.
• Considering that the qualification & experience are commensurate with the size & operations of the company.
• Recommending the members to approve the appointment.
• Calling of EGM(to be held within 3 months from date of Board meeting).

5. Intimate the Auditor and file with ROC form ADT-1(to be attached in form GNL-2 as per MCA circular 09/2014 dated 25th April, 2014) within 15 days of EGM(since the appointment is not final until approval of members).

RESIGNATION OF AUDITOR

As per section 140(2) the Auditor who has resigned from the company shall file within a period of 30 days from the date of resignation, a statement in the prescribed form with the company and ROC indicating the reasons and other facts as may be relevant with regard to his resignation in form ADT-3(to be attached in form GNL-2 as per MCA circular 09/2014 dated 25th April, 2014). If the auditor does not comply with these requirements, he or it shall be punishable with fine which shall not be less than 50,000/- rupees but which may extend to 5,00,000/-. After resignation the provisions of casual vacancy shall be triggered which has been explained above.

RIDDLE?

A. Is it necessary that a company which needs to comply with provisions of rotation of auditors need to mandatorily constitute audit committee?

AND

B Is it necessary that a company which needs to constitute audit committee need to mandatorily comply with provisions of rotation of auditors?

SOURCE:-

Conditions for audit committee (section 179 read with rule 6 of Companies (Meetings of Board and its Powers) Rules, 2014):-

• Listed Companies.
• Public companies with a paid up capital of Rs. 10 crore or more.
• Public companies having turnover of Rs. 100 crore or more.
• Public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs. 50 crore or more.

Conditions for rotation of auditors (section 139(2) read with rule 5):-

• Listed Companies.
• Public companies having paid up capital of Rs. 10 crore or more.
• Private limited companies having paid up capital of Rs. 100 crore or more.
• All companies having paid up capital of below threshold limit mentioned above, but having public borrowings from financial institutions, banks or public deposits of Rs. 50 crore or more.

ANSWER:-

Companies to which audit committee applies but not rotation:-

1. Public companies having turnover f more tan Rs. 100 crores but paid-up capital less than Rs. 10 crores.

2. Public companies which have issued debentures or have borrowed money from other than bank/financial institution in excess of Rs. 50 crores.

Companies to which rotation applies but not audit committee:-

1. Private companies having paid up capital of Rs. 100 crore or more.

2. Private companies which have borrowed money from financial institutions/banks in excess of Rs. 50 crores.

Disclaimer: The entire contents of this article have been prepared on the basis of relevant provisions and information existing at the time of preparation. The observations of the author are personal view and the author does not take any responsibility of the same and this cannot be quoted without the written consent of the author or website.  

(Author may be contacted on [email protected] for Suggestions, comments and queries )

Click Here to Read Other Articles written by Gurminder Dhami