The Companies Act, 2013 (“the Act”) has changed the role of auditors in companies, seeking greater transparency and corporate responsibility. Past serious financial frauds and scandals especially Satyam Scandal has exposed glaring gaps in the governance structure and auditing practices. The Companies Act, 2013 has been passed for strengthening corporate governance and auditing practices. The Act mandates compulsory rotation of auditors for certain class of companies and prescribes duties and responsibilities of auditors.
The Act obligates to auditors that if he has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company then he shall immediately report the matter to the Central Government not later than sixty days of his knowledge.
Appointment of Auditors:
As per Section 139 (1) of the Act every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting (“AGM”).
Appointment of Auditor shall be subject to ratification of members of the company in every AGM by way of passing of an ordinary resolution.
A written consent of the auditor to such appointment and a certificate from the auditor shall be obtained and the certificate shall indicate that –
a. 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;
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 with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.
And the certificate shall also indicate whether the auditor satisfies the criteria provided in section 141 of the Act.
Manner and procedure of selection and appointment of auditors - Rule 3 of Companies (Audit and Auditors) Rules, 2014:
In case of a company that is required to constitute an Audit Committee under section 177, the Audit committee and in any other case the Board, shall take into consideration the qualifications and experience of the auditor and whether such qualifications and experience are commensurate with the size and requirements of the company.
Before considering the appointment of auditor, the Audit Committee or the Board, as the case may be, shall consider any pending proceeding relating to professional matters of conduct against the proposed auditor before the ICAI or any competent authority or any Court. Further they may call for such other information from the proposed auditor as it may deem fit.
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 AGM for appointment.
If the Board agrees with the recommendation of the Audit Committee, it shall further recommend the appointment of auditor to the members in the AGM and if the Board disagrees it shall refer back the recommendation to the committee for reconsideration citing reasons for such disagreement.
The auditor appointed in the AGM shall hold office from the conclusion of that meeting till the conclusion of the sixth AGM subject to ratification in every AGM till the sixth such meeting by way of passing of an ordinary resolution.
If the appointment is not ratified by the members of the company, the Board of Directors shall appoint another auditor after following the procedure laid down in this behalf under the Act.
The company shall inform the auditor concerned of its appointment, and also file a notice of such appointment with the Registrar within fifteen days of the meeting in which the auditor is appointed.
Under the 1956 Act the responsibility of intimation to ROC, in respect of appointment of auditor was with the auditor of the company. However, under 2013 Act the responsibility has been shifted to the company.
Under the 1956 Act auditors had to intimate to the ROC in Form 23B within 30 days of receipt of intimation from the company. Under the 2013 Act the company shall file notice of appointment of Auditor in Form ADT-1 within 15 days of appointment of Auditor.
Form ADT-1 is not available electronically. As per the general circular no 09/2014 dated 25th April, 2014 issued by Ministry of Corporate Affairs (“MCA”), form ADT-1 can be filed as an attachment of Form GNL-2 till MCA make available Form ADT-1 electronically.
Term of Auditor:
As per Section 139 (2) of the Act all listed company or all unlisted public companies having paid up share capital of Rs. 10 crore or more, all private limited companies having paid up share capital of Rs. 20 crore or more, all companies having public borrowings from financial institutions, banks or public deposits of Rs. 50 fifty crores or more shall not appoint or re-appoint an individual as auditor for more than one term of 5 consecutive Years; and an audit firm as auditor for more than two terms of 5 consecutive years. Three years transition period is provided for the comply of this provision.
An audit firm cannot be appointed as auditor of the company for a period of five years, if same firm presently having a common partner(s) to the previous audit firm, whose tenure has expired in a company immediately preceding the financial year.
Manner of rotation of auditors by the companies on expiry of their term- Rule 6:
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, and in other cases, the Board shall itself consider the matter of rotation of auditors and make its recommendation for appointment of the next auditor to the members in annual general meeting.
For the purpose of the calculation of the period (five years or ten years) 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.
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.
“Same network” includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control.
For example: If an individual has been functioning as auditor in the same company for 2 – 5 consecutive years then he can be appointed maximum period of 3 years.
If a firm has been functioning as auditor in the same company for 7 – 10 consecutive years then it can be appointed maximum period of 3 years. If it has been functioning as auditor for 6 consecutive years then it can be appointed maximum period of 4 years.
Consecutive years shall mean all the preceding financial years for which the firm has been the auditor until there has been a break by five years or more.
Where a company has appointed two or more individuals or firms or a combination thereof as joint auditors, the company may follow the rotation of auditors in such a manner that both or all of the joint auditors, as the case may be, do not complete their term in the same year.
Appointment of auditor in case of Government Company:
The First auditor shall be appointed by the Comptroller and Auditor General within 60 days from the date of incorporation and in case of failure to do so, the Board shall appoint auditor within next 30 days and on failure to do so by Board of Directors, it shall inform the members, who shall appoint the auditor within 60 days at an extraordinary general meeting (“EGM”), such auditor shall hold office till conclusion of first AGM.
In the case subsequent, the Comptroller and Auditor-General of India shall appoint an auditor within a period of 180 days from the commencement of the financial year, who shall hold office till the conclusion of the AGM.
Any casual vacancy in the office of an auditor shall be filled by the Comptroller and Auditor-General of India within thirty days. In case the Comptroller and Auditor-General of India does not fill the vacancy within 30 days, the Board of Directors shall fill the vacancy within next 30 days.
Appointment of first auditor:
Section 139(6) of the Act stipulated that first Auditor of the Company other than Government Company, shall be appointed by the Board within 30 days of its date of registration and in case of failure to do so by Board of Directors, the members shall be informed and they shall appoint the same within 90 days from incorporation, who shall hold office till conclusion of first annual general meeting.
Resignation of Auditor:
Section 140 (2) of the Act provides that the auditor who has resigned from the company shall file within thirty days from the date of resignation, a statement with the company and the Registrar, indicating the reasons and other facts as may be relevant with regard to his resignation. The statement shall be filed in Form ADT-3 (Rule 8). This is new concept introduced by the Companies Act, 2013.
Casual vacancy of Auditor:
Any casual vacancy in the office of an auditor shall be filled by the Board of Directors within thirty days. If such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting.
Eligibility and qualifications of auditor - Section 141(1):
- A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant.
Where a firm including a limited liability partnership 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.
Disqualifications of auditor - Section 141(3):
Following persons shall not be eligible for appointment as an auditor-
a. a body corporate except limited liability partnership;
b. an officer or employee of the company;
c. a person who is a partner, or who is in the employment, of an officer or employee of the company;
d. A person whose relative is holding security or interest not exceeding Rs. one Lac face value in companies as mentioned above.
Is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of rupees five lacs;
A person who or whose relative or partner has given a guarantee or provided any security in connection with the indebtedness of any third person to the company
a. A person or a firm who, whether directly or indirectly, has “business relationship” with the company, or its subsidiary, or its holding or associate company;
b. A person who is in full time employment elsewhere;
c. Person who is auditor of more than 20 companies;
MCA issued a draft letter for public comments on 24th June, 2014 to give certain exemptions to private limited companies inter alia for the purpose of counting 20 companies, private companies shall be excluded.
By: Shashikant Sharma
Company Secretary
E-mail: csshashikant.sharma@gmail.com
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