Rotation of Auditors under section 139(2)

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Gayathri (Querist)
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06 April 2021 Dear Members,
An unlisted public co. Borrowings crosses 50Cr as on 31st Mar,2019.Paid up capital is below the limits prescribed. An Audit firm was serving as auditor for past 10 years and is reappointed for another term of in AGM held in 2019. Kindly clarify the below issues:
1. Are the limits prescribed in Rule 5 of the Companies (Audit and Auditors) Rules,2014 to be checked “At “ the time of appointment of audit firm?
2. For the calculation of term specified in section 139(2), the period served as an auditor before the applicability of limits specified in Rule 5, be counted?

Thanks in advance.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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11 July 2024 Let's address your queries regarding the appointment of auditors in an unlisted public company:

1. **Checking Limits at the Time of Appointment:**
According to Rule 5 of the Companies (Audit and Auditors) Rules, 2014, an audit firm cannot be appointed for more than two terms of five consecutive years. However, this rule is applicable only if the company meets certain thresholds related to paid-up capital and borrowings:
- Paid-up capital and borrowings thresholds were introduced in the rules from the financial year starting on or after 1st April 2014.
- The limits prescribed in Rule 5, such as the paid-up capital exceeding Rs. 10 crore or borrowings exceeding Rs. 50 crore as on the last date of the immediately preceding financial year, need to be checked at the time of appointment of the audit firm.
- Therefore, for your situation where the borrowings crossed Rs. 50 crore as on 31st March 2019, you should check if the company meets the thresholds at the time of appointing the audit firm for the AGM held in 2019.

2. **Calculation of Term for Section 139(2):**
- Section 139(2) of the Companies Act, 2013 specifies that an audit firm cannot be appointed as auditor for more than two terms of five consecutive years. The calculation of this term includes the period served by the audit firm before the thresholds specified in Rule 5 became applicable.
- In your case, if the audit firm has been serving as the auditor for the past 10 years, including before the thresholds in Rule 5 were applicable, these years would be counted towards the maximum term limit specified under Section 139(2).
- Therefore, the period served by the audit firm before the applicability of the limits specified in Rule 5 should indeed be counted when determining whether the firm can be reappointed for another term.

In summary:
- Check if the company met the thresholds specified in Rule 5 at the time of appointing the audit firm in the AGM held in 2019.
- Count the period during which the audit firm has served as auditor, including the years before the thresholds in Rule 5 were applicable, towards the maximum term limit under Section 139(2).

It's advisable to also consult with a professional familiar with company law or a qualified auditor for specific advice tailored to your company's circumstances and compliance requirements.