Appointment of an Auditor as per Section 139

Section 139: Appointment of Auditors

Sec 139 of the Companies Act 2013 provides that every company shall appoint an individual or firm(including LLP) as an auditor of the company. Appointment of an auditor is subject to the Board of directors and members of the company at AGM or EGM. This section specifies the manner in which a first or subsequent auditors shall be appointed or reappointed. A Subsequent Auditor shall hold the office from the conclusion of the AGM in which he was appointed until the conclusion of the sixth AGM.

Section 139(6)&139(7): Appointment Of First Auditor

A first auditor shall be appointed by the Board of directors of the company within 30 days of its registration in case of all companies (except Government companies*).

In case of a Government company, the first auditor shall be appointed by CAG of India within 60 days from date of registration of the company.

Such a person shall hold the office until the conclusion of the First Annual General Meeting.

For a better understanding kindly refer below:

*What is a Government Company?

Section 139(1): Appointment of a Subsequent Auditor and Manner of Appointment

A person appointed as the first auditor shall hold the office till the conclusion of First AGM of the company thus it necessary to appoint a subsequent auditor for the term of 5 Years or 10 Years as the case may be:

1. Appointment: Every company shall appoint an individual or firm as an auditor of the company at the first AGM. The appointment includes Re- Appointment. Firm Includes LLP (Limited Liability Partnership).

2. Tenure: The person so appointed shall hold the office from the conclusion of the AGM in which he was appointed until the conclusion of the sixth AGM. The Meeting wherein such an appointment has been made will be counted as the First Meeting.

3. In the case of no appointment, the existing Auditor of the company shall remain Auditor until the conclusion of the next Annual General Meeting.

Matters relating to the appointment of auditor in First AGM:

A. Ratification at Every Annual General Meeting (AGM): [First Proviso of Section-139 (1)]

Although the duration of office is Five (5) years and Ten (10) years, the company will place the matter for ratification at every AGM.

B. Consent And Certificate From Auditor: [Second Proviso of Section-139 (1)]:

Documents Require from Auditor before Appointment in AGM

→ Written Consent of the auditor for such an appointment.
→ Certificate from auditor for such an appointment.
→ Under Rule 4 of Chapter-X, Auditor shall state in the said certificate that he satisfies the conditions given below: (Third Proviso of Section- 139(1);

The individual or the firm, as the case may be, 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;

• 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.

C. Intimation to Auditor & Notice to Registrar:- [Fourth Proviso of Section-139 (1)]:

The Company shall within Fifteen (15) Days of Annual General Meeting (AGM) :

• Inform the Auditor of his Appointment.

• File Notice of such appointment with ROC in Form- ADT-1 [Attach form ADT-1 in E-Form- GNL-2 ] and file with ROC (As per MCA Circular No. 09/2014 dated April 25, 2014.

Sections 139(2),139(3),139(4), Rules: Rotation of An Auditor

A. Applicability: Which companies can't have the same auditor for 2 consecutive Audit terms?

• Listed Companies

• All Unlisted public company having Paid-up share capital of Rs. 10 crores or more

• All private limited companies having Paid-up share capital of Rs. 50 crores or more

• All companies having paid-up share capital below the threshold limits as mentioned above but having Public borrowing from financial institutions, banks or public deposit of Rs. 50 crore or more.

• Excluded companies- One person companies and Small Companies

B. Tenure

a. An Individual as an Auditor: The same Auditor can not be appointed for more than 1 Term of 5 Consecutive Years.

b. An Audit Firm as an Auditor: Audit Firm can not be appointed for more than 2 Terms of 5 Consecutive Years.

C. Auditors Ineligible for appointment

Note: The same network means the firms working under the same brand name, trade name or common control.

Manner of rotation of auditors by the companies on expiry of their term under Rule 6 of Companies (Audits and Auditors) Rules, 2014 -

(1) The Audit Committee shall recommend to the Board, the name of an individual auditor or of an audit firm who may replace the incumbent auditor on expiry of the term of such incumbent.

Where a company is required to constitute an Audit Committee, the Board shall consider the recommendation of such committee

(2) In other cases, the Board shall itself consider the matter of rotation of auditors and make its recommendation for appointment of the next auditor by the members in the annual general meeting.

(3) For the purpose of the rotation of auditors-

(i) in case of an auditor (whether an individual or audit firm), 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;

(ii) 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.

Explanation. I-For the purpose of rotation of auditors,-

(a) a break in the term for a continuous period of five years shall be considered as fulfilling the requirement of rotation;

(b) 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.

Sec 139(5): Appointment of a Subsequent Auditor in case of Government Co.

Irrespective of the provisions mentioned under Section 139(1), in case of the Government Company, the auditor shall be appointed by the CAG of India within a period of 180 days from the commencement of the year who shall hold the office till the conclusions of Next the Annual General Meeting (AGM).

139(8): Casual Vacancy

Casual Vacancy has not been defined in the Companies Act. It stands for a vacancy created by the auditor ceasing to act after he was validly appointed and the appointment was accepted.

This may arise due to a variety of reasons like resignation, disqualification, dissolution of CA firm, etc.

Section 139(9): Reappointment of Retiring Auditor

A Retiring auditor can be reappointed if

• The auditor is not disqualified;

• Auditor has not given notice in writing of his/her unwillingness to continue as an Auditor of the company;

• A Special Resolution has not been passed at that AGM in order to appoint another auditor instead of the Retiring Auditor. In such cases, the retiring auditor shall not be reappointed.

Sec 139(10): No Appointment or Re-Appointment of an Auditor at AGM

This section provides that where at any AGM is not appointed or reappointed then the existing auditor shall continue to be the auditor of the company.

Sec 139(11): Audit Committee

Where a company is required to constitute an audit committee then all appointments of an auditor including filling of casual vacancy shall be made after taking into account the recommendations of such audit committee.