Companies Act 2013: Auditor Appointment Rules & Guidelines

Introduction: The process of appointing auditors in accordance with the Companies Act, 2013 involves a structured set of rules and regulations. Understanding the provisions outlined in Section 139, as well as the associated rules and guidelines, is crucial for companies to ensure a smooth and compliant auditor appointment process. This article delves into the nuances of auditor appointment, covering aspects such as the term of appointment, eligibility, procedures, and more.

Appointment of Auditor Under section 139 of Companies Act, 2013 read with Companies (Audit & Auditors) Rules, 2014.

Section 139 (1)–

Every Company shall at 1^st AGM, appoint an individual or firm as an auditor who shall hold the office from the conclusion of that meeting till the conclusion of its 6^th AGM and thereafter till the conclusion of every 6^th AGM.

As per Rule 4 of the Companies (Audit & Auditors) Rules, 2014, Before appointment is made, the written consent of such appointment and certificate shall be obtained from the auditor.

The Auditor shall submit a Certificate that-

a. He is not disqualified for appointment under the Companies Act, 2013 and Chartered Accountants Act, 1949 and the rules or regulations made thereunder.

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

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

d. The list of proceedings against the auditor or audit firm or any partner of the audit firm pending, if any, as disclosed in the certificate.

The Notice to the registrar about appointment of auditor shall be in Form ADT-1 within 15 days from the date of appointment.

Section 139(2) read with rule 5 of the Companies (Audit & Auditors) Rules, 2014- The following classes of Companies excluding OPC and Small Company shall not appoint or reappoint-

• Listed Company or
• Unlisted Public Company having a PSC of Rs. 10 Crore or more;
• Private Limited Company having a PSC of Rs. 50 Crore or more;
• All Companies having public borrowings from financial institution, banks or public deposits of Rs. 50 crore or more;

(a) An individual as auditor for more than 1 term of 5 consecutive years, and

(b) an audit firm as auditor for more than 2 terms of 5 consecutive years.

Provided that – an individual auditor or an audit firm has completed the term under clause (a) and (b) shall not be eligible for re-appointment as auditor in the same company for five years from the completion of such term.

• 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 a period of five years.

Section 139(3)-

The audit shall be conducted by more than 1 auditor.

Section 139(5)-

In case of a Govt. Company or any other Company owned or controlled directly or indirectly, by the Central Govt. or State Govt. or partly by the Central Govt. or partly by the 1 or more State Govt., the Comptroller and Auditor-General (C&AG) of India shall, in respect of financial year, appoint an auditor within a period of 180 days from the commencement of financial year, who shall hold the office till the conclusion the AGM.

[The 1^st Auditor shall be appointed by the C&AG of India within 60 days from the date of registration of the Company and in case of failure of C&AG, the BOD of the Company shall appoint the such auditor within next 30 days and in case of failure of the Board, it shall inform the members of the Company who shall appoint such auditor within 60 days at an EGM, who shall hold the office till the conclusion 1^st AGM].

Section 139(6)-

The First Auditor of Company other than Govt. Company, shall be appointed by the BOD within 30 days from the date of registration of Company and in case of failure of Board to appoint such auditor, it shall inform the members of company who shall within 90 days at an EGM appoint such auditor and such auditor shall hold the office till the conclusion of 1^st AGM.

Any Casual Vacancy in the office of an Auditor shall-

a. In case of Company other than Govt. Company, be filled by the BOD within 30 days but if such casual vacancy is as a result of resignation of an auditor, such appointment shall be approved by the company at general meeting convened within 3 months of recommendation of the Board and hold the office till the conclusion next AGM.

b. In case of Company be filled by the C&AG of India within 30 days and in case of failure of C&AG of India, the BOD shall fill the vacancy within next 30 days.

A retiring auditor may be reappointed at an AGM if-

a. He is not disqualified for the appointment.

b. He has not given a notice in writing of his unwillingness to be reappointed

c. Special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be reappointed.

Where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company.

Rule 3 of Companies (Audit & Auditors) Rules, 2014, deals with Manner and Procedure of Selection and Appointment of Auditors.

1. In case of a company that is required to constitute an Audit Committee under section 177, the committee, and, in cases where such a committee is not required to be constituted, the Board, shall take into consideration the qualifications and experience of the individual or the firm proposed to be considered for appointment as auditor and whether such qualifications and experience are commensurate with the size and requirements of the company.

2. The Audit Committee or the Board, as the case may be, may call for such other information from the proposed auditor as it may deem fit.

3. Where a company is required to constitute the Audit Committee, the committee shall recommend the name of an individual or a firm as auditor to the Board for consideration and in other cases, the Board shall consider and recommend an individual or a firm as auditor to the members in the annual general meeting for appointment.

4. If the Board agrees with the recommendation of the Audit Committee, it shall further recommend the appointment of an individual or a firm as auditor to the members in the annual general meeting.

5. If the Board disagrees with the recommendation of the Audit Committee, it shall refer back the recommendation to the committee for reconsideration citing reasons for such disagreement.

6. If the Audit Committee, after considering the reasons given by the Board, decides not to reconsider its original recommendation, the Board shall record reasons for its disagreement with the committee and send its own recommendation for consideration of the members in the annual general meeting; and if the Board agrees with the recommendations of the Audit Committee, it shall place the matter for consideration by members in the annual general meeting.

7. The auditor appointed in the annual general meeting shall hold office from the conclusion of that meeting till the conclusion of the sixth annual general meeting, with the meeting wherein such appointment has been made being counted as the first meeting.

• The word “firm” shall include a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008.

Conclusion: The process of auditor appointment, governed by the Companies Act, 2013, is designed to ensure transparency, accountability, and the adherence to regulatory standards. By following the procedures specified in Section 139 and the associated rules, companies can confidently appoint auditors who meet the required qualifications and who can play a crucial role in maintaining the financial integrity of the organization. Staying updated with the guidelines and procedures outlined in the Act is essential to navigate the auditor appointment process seamlessly while upholding compliance.