Legal aspects for Appointment of first Statutory Auditors in a Private Company and Procedure involved
Appointment of statutory auditors in a Company incorporated under the Companies Act is one of the important compliance to which every Company should adhere to in terms of Section 139 of the Companies Act, 2013. The auditor so appointed shall carry out the statutory audit of the financial statements which includes books of accounts, statutory records, documents, vouchers, invoices etc. of the Company to ascertain that the financial statements are free from material misstatements and present a true and fair view of the Company’s financial position to various stakeholders like shareholders, creditors, government authorities, vendors, suppliers, loyal customers etc.
In this article we will take you through the legal provisions of the Companies Act, 2013 and practical aspects to be taken care of in the process of appointment of first Statutory Auditors in a Private Limited Company to ascertain that the financial statements are free from material misstatements and present a true and fair view of the Company’s financial position to various stakeholders like shareholders, creditors, government authorities, vendors, suppliers, loyal customers etc.
In this article we will take you through the legal provisions of the Companies Act, 2013 and practical aspects to be taken care of in the process of appointment of first Statutory Auditors in a Private Limited Company.
Purpose for appointment of an auditor:
Some of the prudent reasons for appointment of an auditor in a Company is:
(1) Auditor shields businesses from fraud, point out the discrepancies in accounting methods.
(2) Auditor works on a consultancy basis helping organizations to spot ways to boost operational efficiency.
(3) Often, Board of Directors present themselves as the company’s real owner, which sometimes springs the way for them to commit fraud, mismanage funds of shareholders, creditors. Therefore, audit done by auditor keeps a check on them.
(4) Auditors with professional attitude give reasonable assurance that the company’s financial statements are free from material misstatements.
(5) To conduct financial review of projects to confirm the utilization of budgets for achieving desired outcomes.
Statutory Provisions for the appointment of Auditors under the Companies Act, 2013:
Section 139 of the Companies Act, 2013 deals with the appointment of statutory auditors of a Company. In this regard, there are three types of auditors to be appointed in a Company which are as under:
(i) Appointment of first auditors of the Company;
(ii) Appointment of subsequent auditors of the Company; and
(iii) Appointment of auditors in case of causal vacancy due to resignation of existing auditors.
In this article, we will only discuss the legal aspects of appointment of first auditors out of the above three cases.
(I) Appointment of first auditors of the Company: Section 139(6) of the Companies Act, 2013 provides that the first auditor of a Company, other than a Government Company, shall be appointed by the Board of Directors within 30 days from the date of registration of the Company.
Further, it also provides that if the Board of Directors fails to appoint first auditors within 30 days of incorporation of the Company then it (directors) shall inform the members of the Company, who shall within 90 days at an extraordinary general meeting, appoint such auditor and such auditor shall hold office till the conclusion of the first annual general meeting.
It is pertinent to note here that the time limit of 90 days shall be calculated from the date of incorporation of the Company and not from the ending of 30th day from the registration of Company.
Procedure for appointment of First Auditor in a Private Company: The Procedure for appointment of first auditors of a Company may be divided into two scenarios i.e. (a) first auditors appointed by Board of the Company; and (b) first auditors appointed by the members of the Company.
Scenario 1: Appointment of Auditor by the Board of Directors of the Company in Board Meeting:
(1) After incorporation of the Company, the Board of Directors of a Company shall send a proposal letter to the proposed Auditor for acting as a first statutory auditor of the Company. The proposal letter to the auditor shall contain following matters:
> Making an offer to the proposed auditor/auditor’s firm to act as first statutory auditors of the Company;
> Services offered by auditor shall be such as may be approved by the Board of Directors;
> Expecting from auditors to share consent letter along with eligibility certificate w.r.t. criteria provided under Section 141 of the Companies Act, 2013;
> Confirmation as to compliance of conditions as stipulated in Rule 4 of Companies (Audit & Auditors) Rules, 2014.
(2) Obtain consent letter and eligibility certificate from the proposed first auditor /auditor’s firm stating that auditor satisfies the criteria provided under Section 141 of the Companies Act, 2013. The eligibility certificate given by auditor shall state:
> He/She/It, as the case may be, is eligible for appointment and is not disqualified for appointment under the Companies Act, 2013, the Chartered Accountants Act, 1949 and the rules made thereunder;
> The proposed appointment is as per the term provided under the Act; > The proposed appointment is within the limits laid down by or under the authority of the Act;
> The list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.
(3) Issue Notice for holding Board Meeting to all the Directors of Company at their addresses registered with the Company, at least 7 clear days before the date of Board Meeting. This meeting is to be called within 30 days from the date of incorporation of the Company. [Section 173 of Companies Act, 2013 and SS-1 to be adhered]. Provided that if Board Meeting is called at shorter notice then shorter notice consent letters shall be signed by all the Board of Directors of the Company.
(4) Attach agenda, notes to agenda and draft resolution with the notice of Board Meeting.
(5) Hold a meeting of Board of Directors of the Company on a date, time & venue stipulated in notice and pass the necessary Board Resolution for appointment of first auditors of the Company and fix the remuneration of the First Statutory Auditor so appointed.
(6) Draft minutes of the board meeting shall be circulated to all the directors within 15 days from the date of conclusion of the meeting by hand delivery or by registered post or by speed post or by courier or by email or by any other recognised electronic means. [Section 118(1) of the Companies Act, 2013 read with Clause 7.4 of Secretarial Standard on Board Meeting-1 promulgated by the Institute of Company Secretaries of India]
(7) Issue a letter of appointment after conclusion of Board Meeting along with certified true copy of board resolution for appointment of the auditors.
Scenario 2: Appointment of Auditor by the Members of the Company in Extraordinary General Meeting (EGM):
As per section 139(6) of the Companies Act, 2013, in case Board of Directors fails to appoint the first auditor within 30 days from the date of registration of the Company, it shall intimate to the members of the Company, who shall within 90 days appoint first auditors of the Company at a duly convened Extraordinary General Meeting (EGM). Further, such auditor shall hold office till the conclusion of the first Annual General Meeting (AGM). In this case, following procedure shall follow:
(1) Board of Directors of the Company shall send a proposal letter to the proposed Auditor / Auditor’s firm for acting as a first statutory auditor of the Company. Proposal letter to the auditor shall contain following matters:
> Making an offer to the proposed auditor / auditor’s firm to act as first statutory auditors of the Company;
> Services offered by auditor shall be such as may be approved by the Board of Directors;
> Expecting from auditors to share consent letter along with eligibility certificate w.r.t. criteria provided under Section 141 of Companies Act, 2013;
> Confirmation as to compliance of conditions as stipulated in Rule 4 of Companies (Audit & Auditors) Rules, 2014.
(2) Obtain consent letter and eligibility certificate from proposed first auditor stating that auditor satisfies the criteria provided in Section 141 of Companies Act, 2013. The eligibility certificate given by auditor shall state the following:
> He/She/It, as the case may be, is eligible for appointment and is not disqualified for appointment under the Companies Act, 2013, the Chartered Accountants Act, 1949 and the rules made thereunder;
> The proposed appointment is as per the term provided under the Act; > The proposed appointment is within the limits laid down by or under the authority of the Act;
> The list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.
(3) Issue Notice of Board Meeting to all the Directors of Company at their addresses registered with the Company, at least 7 clear days before the date of Board Meeting. [Section 173 of Companies Act, 2013 and SS-1 to be adhered]. Provided that if Board Meeting is called at shorter notice then shorter notice consent letters shall be signed by all the Board of Directors of the company.
(4) Attach agenda, notes to agenda and draft resolution with the Notice.
(5) Hold a meeting of Board of Directors of the Company on a date, time & venue stipulated in notice and pass the necessary Board Resolution with respect to the following.
> To recommend the appointment and fixation of remuneration of the First Statutory Auditor of the Company;
> To approve the draft notice of Extraordinary General Meeting with explanatory statement and convening Extraordinary General Meeting for passing an ordinary resolution;
(6) Draft minutes of the board meeting shall be circulated to all the directors within 15 days from the date of conclusion of the meeting by hand delivery or by registered post or by speed post or by courier or by email or by any other recognised electronic means. [Section 118(1) of the Companies Act, 2013 read with Clause 7.4 of Secretarial Standard on Board Meeting-1 promulgated by the Institute of Company Secretaries of India].
(7) Send notice of Extraordinary General Meeting to all the members, directors of the Company and proposed auditors at least 21 clears days before the date of meeting. [Section 101(1) of Companies Act, 2013].
Provided that Extraordinary General Meeting can also be called at a shorter notice, by obtaining shorter notice consent letters from majority in number of members entitled to vote and who represent not less than 95% of such part of the paid-up share capital of the Company. [Clause (2) of First Proviso to Section 101(1) of Companies Act, 2013]
(8) Hold the Extraordinary General Meeting on scheduled date, time & venue and pass the ordinary resolution for appointment of first auditor who shall hold office till the conclusion of first Annual General Meeting and approve the remuneration to be paid to him as recommended by the Board of Directors.
(9) Draft minutes of the general meeting of members shall be prepared and signed by the chairman of the meeting within 30 days of the conclusion of the meeting.[Section 118(1) of Companies Act, 2013 read with Clause 17.4 and 17.5 of Secretarial Standard on General Meeting-2 promulgated by Institute of Company Secretaries of India]
Filing of Form ADT-01 for appointment of first auditors of the Company either in Board meeting or in Extraordinary General Meeting:
It is significant to mention here that for appointment of first auditors, the Companies Act, 2013 do not mandate to file Form ADT-01 with the Registrar of Companies.
However, for better corporate governance, it is recommended to file Form ADT-01 in case of appointment of first auditors as well. Further, for appointment of subsequent auditors or auditors appointed due to causal vacancy caused after resignation of existing auditors, Form ADT-01 is mandatorily to be filed with the Registrar of Companies within 15 days of such appointment along with fee as may be applicable.
+ Details required at hand while filling Form ADT-1:
> PAN of the auditor or auditor’s firm;
> Membership Number of Auditor’s or firm’s registration number of the Auditor;
> Address of the auditor or auditor’s firm;
> Email Id of the auditor or auditor’s firm.
+ Attachments to filed with Form ADT-1:
> Signed copy of written consent given by the Auditor;
> Certified true copy of the resolution passed for appointment of first auditors;
> Signed copy of the intimation sent by the Company to the Auditor.
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In case of any query with respect to appointment of first auditors of the Company, you may write on harsh@sarvaankassociates.com.
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