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 1st 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 1st 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
APPOINTMENT OF AUDITOR AT 1ST AGM
As per section 139(1) every company shall appoint at its 1st 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.
Written consent and certificate from the auditor for appointment of auditor :- As per 2nd 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:-
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.
1. Intimate the proposed auditor(s) regarding the intention of appointing him/it as auditor and ask for the following information and documents:-
2. Call Board meeting for the purpose of following:-
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-
Does Re-APPOINTMENT or RATIFICATION of auditor at AGM require obtaining written consent, certificate and filing of form ADT-1 ?
As per 2nd,3rd & 4th 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.
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 :-
ROTATION OF AUDITORS
As per section 139(2) no listed company or companies as prescribed shall appoint or re-appoint :-
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:-
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))
Companies prescribed (rule 5):-
Following companies excluding one person companies and small companies:-
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)
Transitional period:- For companies existing on commencement of this act, 3 years from such commencement (2nd proviso to section 139(2))
SPECIAL RIGHTS TO SHAREHOLDERS
As per section 139(3) members have following rights after passing resolution in their meeting:-
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 :-
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 1st 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 – 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:-
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.
A. Is it necessary that a company which needs to comply with provisions of rotation of auditors need to mandatorily constitute audit committee?
B Is it necessary that a company which needs to constitute audit committee need to mandatorily comply with provisions of rotation of auditors?
Conditions for audit committee (section 179 read with rule 6 of Companies (Meetings of Board and its Powers) Rules, 2014):-
Conditions for rotation of auditors (section 139(2) read with rule 5):-
Companies to which audit committee applies but not rotation:-
Companies to which rotation applies but not audit committee:-
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