Summary: Under Section 141 of the Companies Act, 2013, a person is eligible for appointment as an auditor only if they are a chartered accountant as per the Chartered Accountants Act, 1949. A firm, including LLPs, may also be appointed if the majority of its partners practising in India are qualified chartered accountants. In such cases, only qualified partners may act and sign on behalf of the firm. Section 141(3) and related rules outline specific disqualifications. These include: bodies corporate (except LLPs); officers or employees of the company; and persons closely associated with such officers or employees. Also disqualified are individuals or their relatives/partners who: (i) hold securities in the company or its related entities beyond a prescribed limit, (ii) owe the company over ₹5 lakh, or (iii) have guaranteed debts of others exceeding ₹1 lakh. Those having direct or indirect business relationships with the company or its group entities are ineligible, as are individuals whose relatives are directors or key managerial personnel. Additionally, full-time employees elsewhere and auditors already serving over 20 companies are disqualified. Conviction for fraud within the last ten years and rendering services barred under Section 144 also disqualify a person from being appointed. As per Section 141(4), if an appointed auditor becomes disqualified during the tenure, the position is automatically vacated without the need for notice, creating a casual vacancy. Therefore, auditors must remain compliant with Section 141(3) requirements throughout their term.
Qualifications of an auditor [Section 141(1) & (2)]
(1) A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant within the meaning of the Chartered Accountants Act, 1949.
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.
In case of a partnership firm – Company appoints the “Firm” not the partner in individual capacity.
(2) Where a firm including a limited liability partnership (LLP) 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. [Section 141(2)]
Disqualifications of Auditors:
[Section 141(3) and Rule 10 of Companies (Audit and Auditors) Rules, 2014]:
The following persons shall not be eligible for appointment as an auditor of a company, namely:
(a) “a body corporate other than a limited liability partnership (LLP) registered under the Limited Liability Partnership Act, 2008”;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment (employee), of an officer or employee of the company;
(d) a person who, or his relative or partner ;
(i) 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;
Provided that the relative may hold security or interest in the company of face value not exceeding one lakh rupees or such sum as may be prescribed;
(ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of Rs. 5 Lacs; OR
(iii) 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, in excess of ` 1 Lac;
(e) a person (auditor) ora firm who, whether directly or indirectly (through agent/relation), has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company;
It means – Auditor or Firm should not have business relationship with the group either directly or indirectly.
(f) A person whose relative is a director or is in the employment of the company as a director or key managerial personnel;
(In simple words – a person whose relative is a director or key managerial person of the company is disqualified)
(g) 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;
(h) 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.
(i) A person who directly or indirectly rendered any service referred to in section 144 to the company, its holding or its subsidiary.
(Section 144 deals with prohibited services by auditor).
Section 141(4) – Says
If a person appointed as an auditor of a company incurs any of the disqualifications specified in Section 141(3), he shall be deemed to have vacated his office. Such vacation shall be deemed to be a casual vacancy in the office of the auditor.
It means – he must not attract disqualifications u/s 141(3) throughout the tenure of his office. At any time, if he does attract ANY disqualification, it is deemed that NO auditor exists in office. Auditor shall vacate the office immediately and no one need to serve any notice to auditor.
Author Bio
