In summary, Section 139 of the Companies Act 2013 outlines the requirements for appointing auditors in a company. It specifies the duration of their appointment, term limits for auditors, provisions for auditor rotation and multiple auditors, appointment of the first auditor, appointment of auditors for government companies, filling casual vacancies in the auditor’s office, re-appointment of retiring auditors, and the role of the Audit Committee. These provisions ensure transparency, independence, and accountability in the auditing process, promoting good corporate governance practices within companies.
Appointment of Auditor at the First Annual General Meeting (AGM)
- Every company must appoint an individual or a firm as its auditor at its first AGM.
- The auditor will hold office from the conclusion of that meeting until the conclusion of the sixth AGM.
- The appointment should be made in accordance with the prescribed manner and procedure.
- The members of the company should ratify the appointment at every subsequent AGM.
- Before appointing the auditor, the company must obtain the written consent of the auditor and a certificate from them, confirming their compliance with the prescribed conditions.
- The certificate should also indicate whether the auditor meets the criteria provided in Section 141 of the Act.
- The company must inform the appointed auditor of their appointment and file a notice with the Registrar of Companies within fifteen days of the meeting in which the appointment is made.
Term Limits for Auditors
- Listed companies and companies belonging to prescribed classes cannot appoint or re-appoint:
- An individual auditor for more than one term of five consecutive years.
- An audit firm as an auditor for more than two terms of five consecutive years.
- After completing the term, an individual auditor cannot be re-appointed in the same company for five years.
- After completing the term, an audit firm cannot be re-appointed in the same company for five years.
- An audit firm with common partners to another audit firm whose tenure has expired in a company in the previous financial year cannot be appointed as the auditor of the same company for a period of five years.
- Existing companies, present before the commencement of the Act, must comply with these requirements within three years from the Act’s commencement date.
- The company has the right to remove an auditor, and the auditor also has the right to resign from their position.
Rotation and Multiple Auditors
- Members of a company can resolve to:
- Rotate the auditing partner and their team at intervals determined by the members.
- Conduct the audit by more than one auditor.
- The Central Government can prescribe rules for auditor rotation.
First Auditor Appointment
- For companies other than government companies, the first auditor should be appointed by the Board of Directors within 30 days from the company’s registration date.
- If the Board fails to appoint the auditor, the members of the company should appoint the first auditor within 90 days at an extraordinary general meeting.
- The first auditor holds office until the conclusion of the first AGM.
Auditor Appointment for Government Companies
- In the case of government companies or companies owned or controlled by the Central Government, State Government(s), or a combination of both, the Comptroller and Auditor-General of India (CAG) should appoint an auditor within 180 days from the start of the financial year.
- The auditor appointed by the CAG holds office until the conclusion of the AGM.
Casual Vacancy in Auditor's Office
- In the case of a company whose accounts are not subject to audit by the CAG, a casual vacancy in the auditor’s office should be filled by the Board of Directors within 30 days. If the vacancy arises due to the auditor’s resignation, the appointment must be approved by the company at a general meeting within three months.
- In the case of a company whose accounts are subject to audit by the CAG, the CAG should fill the casual vacancy within 30 days. If the CAG fails to make the appointment, the Board of Directors should fill the vacancy within the next 30 days.
Re-appointment of Retiring Auditor
- A retiring auditor may be re-appointed at an annual general meeting if:
- They are not disqualified for re-appointment.
- They have not given written notice of their unwillingness to be re-appointed.
- A special resolution has not been passed at that meeting appointing another auditor or explicitly stating that they shall not be re-appointed.
No Appointment or Re-appointment at AGM
- If at any AGM, no auditor is appointed or re-appointed, the existing auditor will continue to hold office as the company’s auditor.
Role of Audit Committee
- If a company is required to establish an Audit Committee under Section 177 of the Act, all appointments, including filling a casual vacancy in the auditor’s position, should be made after considering the recommendations of the committee.
Eligible Individuals and entities are to be appointed as auditors of a company
As per the Companies Act 2013, only practicing chartered accountants, audit firms, and limited liability partnerships with practicing chartered accountants as partners are eligible to be appointed as auditors of a company. The Act does not allow for the appointment of any other person or entity as an auditor.
Individual Auditors:
- An individual auditor can be appointed if they are a practicing chartered accountant in India.
- They must hold a valid certificate of practice issued by the Institute of Chartered Accountants of India (ICAI).
- The individual should not be disqualified under any provisions of the Act from being appointed as an auditor.
Audit Firms:
- A firm of chartered accountants can be appointed as an auditor.
- The firm must have a valid certificate of practice issued by the ICAI.
- The firm must have at least one practicing chartered accountant as its partner, who will be responsible for conducting the audit.
Limited Liability Partnerships (LLPs):
- A limited liability partnership incorporated under the Limited Liability Partnership Act, 2008 can also be appointed as an auditor.
- The LLP must have a valid certificate of practice issued by the ICAI.
- It must have at least one practicing chartered accountant as its designated partner, who will be responsible for conducting the audit.
It’s important to note that the eligibility criteria and qualifications for auditors may vary based on specific regulations, guidelines, and professional standards set by the ICAI or any other regulatory authority.
Additionally, the Act provides certain disqualifications for being appointed as an auditor. Some common disqualifications include:
- Being an officer or employee of the company.
- Being a partner or employee of a director or key managerial personnel of the company.
- Having a business relationship with the company, its subsidiary, or its holding company.
- Being indebted to the company or having certain financial interests in the company.
To ensure independence and objectivity, it is essential to appoint auditors who are free from any conflicts of interest and have the necessary expertise to perform their duties effectively. The auditors play a crucial role in examining the company’s financial statements, ensuring compliance with applicable laws and regulations, and providing an independent opinion on the company’s financial position.
| Appointment of Auditor |
|---|
| – Appointed at first AGM |
| – Holds office until the sixth AGM |
| – Ratification of appointment at every AGM |
| – Consent and certificate from the auditor required |
| – Informing the appointed auditor and filing a notice |
| Term Limits for Auditors |
|---|
| – Individuals: maximum one term of 5 consecutive years |
| – Audit firms: maximum two terms of 5 consecutive years |
| – Cooling-off period: 5 years for re-appointment |
| Rotation and Multiple Auditors |
|---|
| – Rotation of auditing partner and team |
| – Option to have multiple auditors |
| First Auditor Appointment |
|---|
| – Board appointment within 30 days |
| – Members’ appointment if the Board fails |
| Auditor Appointment for Government Companies |
|---|
| – CAG appointment within 180 days |
| – Holds office until the conclusion of the AGM |
| Casual Vacancy in Auditor’s Office |
|---|
| – Board or CAG appointment within specified timelines |
| Re-appointment of Retiring Auditor |
|---|
| – Re-appointment subject to eligibility and conditions |
| No Appointment or Re-appointment at AGM |
|---|
| – Existing auditor continues until appointment |
| Role of Audit Committee |
|---|
| – Recommendations considered for auditor appointments |