Company Act,2013 - Auditor - Part II

Rotation of Auditors

Newly enacted Companies Act, 2013 comes with a unique feature of Rotation of Auditors.

No company can appoint an auditor for a period of more than five consecutive years.

The said period of five years is of ten years in case where there is an appointment of firm.

Every company, existing on or before the commencement of this Act which is required to comply with provisions of this sub-section, shall comply with the requirements of this sub-section within three years from the date of commencement of this Act.

Now there is compulsory rotation of auditors.

Rotation has been made in two ways:

1. Rotation of Auditor (within firm)

2. Rotation of Auditor

Members of a company may resolve to provide that—

a. in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members; or

b. the audit shall be conducted by more than one auditor.

It means when a firm of CA has been appointed as an Auditor of the company then the members may resolve that Auditing Partner and his team shall be rotated at such intervals.

They may also resolve that the audit should be conducted by more than one auditor.

Let understand this provision with the help of following example:

Suppose ABC limited has appointed XYZ & Co as an Auditor. XYZ & Co has three partners. Now as per above mentioned clause, the members of ABC Limited may resolve that who will be auditing partner and the interval of his appointment.

Members may also resolve that the audit will be conducted by more then one auditor. It means Joint Auditors. The members may at General Meeting decide that the audit of the company will be done by more than one auditor.

Now lets see the Rules made for which are known as “Companies (Audit and Auditors) Rules,2014 in this regards. The said rule also contains the matters regarding Rotation of Auditors.

A simple understanding is described below for rotation of Auditor. As per Rules,

i. If a company has appointed for more than 5 consecutive year before the commencement of this Act, the company can appoint the said auditor for not more than 3 years.

ii. The above rule is also applicable in case of Appointment of Firm of auditors. Meaning there by if the company has appointed a firm of Chartered Accountants for more than 10 consecutive years, then company can appoint the said audit firm for not more than 3 years.

iii. If a company has appointed an individual auditor for consecutive 4 years, then the said company can appoint the same auditor for not more than 3years.

iv. If a company has appointed an individual auditor for consecutive 3 years, then the said company can appoint the same auditor for not more than 3years.

v. If a company has appointed an individual auditor for consecutive 2 years, then the said company can appoint the same auditor for not more than 3years.

vi. If a company has appointed an individual auditor for 1st time, then the said company can appoint the same auditor for for 4years. In other words the total period for appointment must not exceed 5 years.

vii. The said rule is also applicable for Firm of Chartered Accountants. In their case the period of 5 years is to be substituted for 10 years in total .Meaning thereby if a firm has been appointed for more than 10 years then as per Provision of Companies Act,2013 and rules made there under the said firm can do audit for not more than 3 years in row.

viii. The above discussion can be described in table as under which is also defined in Rules made under Companies Act, 2013.

Applicable in case of an Individual Auditor                                                   

2. Applicable in case of a Firm                                                     

The above table shows the maximum period for which an individual or a firm of Chartered Accountant can be appointed as an Auditor of company.

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 purposes of these rules the term “same network” includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control.

Explanation. II

- 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.

Thanks!

CA Chirag Sheth

You can write me @: chirag_sheth1313@yahoo.co.in or at cachirag1313@gmail.com