Appointment of auditors
Section 139 of the Companies Act, 2013 outlines the rules regarding the appointment of auditors for companies. Let’s break down the key points in a more straightforward manner:
Appointment of Auditors under Section 139 of Companies Act, 2013
First Auditor:
- When a company is formed, the Board of Directors must appoint the first auditor within 30 days.
- If the Board fails to appoint, members must do so within 90 days at an extraordinary general meeting.
Subsequent Auditors:
- Auditors are appointed at the first annual general meeting and hold office until the conclusion of the sixth annual general meeting.
- After the sixth meeting, they continue in office for every sixth meeting.
- The manner of selecting auditors is as prescribed, and their consent must be obtained.
Limitations on Reappointment:
- No individual can be appointed as an auditor for more than one term of five consecutive years.
- No audit firm can be appointed for more than two terms of five consecutive years.
Government Companies:
- For government companies, the Comptroller and Auditor-General of India appoints the auditor for the financial year within 180 days.
Casual Vacancies:
- In case of a vacancy, the Board or the Comptroller and Auditor-General of India must fill it within 30 days.
- If the vacancy is due to resignation, approval by the company in a general meeting is required.
Rotation and Committee Recommendations:
- Members can resolve to rotate auditing partners and their teams at specified intervals or have more than one auditor.
- The Audit Committee’s recommendations must be considered in appointments, including filling casual vacancies.
Retirement and Reappointment:
- A retiring auditor can be reappointed if not disqualified, unwillingness is not expressed, and a special resolution is not passed appointing another auditor.
Informing Authorities:
- The company must inform the auditor of their appointment and file a notice with the Registrar within 15 days of the meeting.
Audit Firm Definition:
- The term “firm” includes a limited liability partnership under the Limited Liability Partnership Act, 2008.
Examples to Explain:
Example 1: First Auditor Appointment Suppose a company is registered today. The Board has 30 days to appoint the first auditor. If they fail, members must appoint within the next 90 days.
Example 2: Reappointment Limitation An individual auditor who completes a five-year term cannot be reappointed in the same company for the next five years. Similarly, an audit firm, after two consecutive terms, must wait for five years before being reappointed.
Remember, these rules are crucial to ensure transparency and competence in financial audits, promoting good governance within companies.
Complete Legal Text of Section 139 of the Companies Act 2013
Subject to the provisions of this Chapter, 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 and thereafter till the conclusion of every sixth meeting and the manner and procedure of selection of auditors by the members of the company at such meeting shall be such as may be prescribed:
6[Omitted]
Provided further that before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him or it that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor:
Provided also that the certificate shall also indicate whether the auditor satisfies the criteria provided in section 141:
1&3[Provided also that the company shall inform the auditor concerned of his or 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.]
Explanation.—For the purposes of this Chapter, “appointment” includes reappointment.
(2) No listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint or re-appoint—
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years:
(i) an individual auditor who has completed his term under clause (a) shall not be eligible for re-appointment as auditor in the same company for five years from the completion of his term;
(ii) an audit firm which has completed its term under clause (b), shall not be eligible for re-appointment as auditor in the same company for five years from the completion of such term:
Provided further that as on the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of five years:
5[Provided also that every company, existing on or before the commencement of this Act which is required to comply with the provisions of this sub-section, shall comply with requirements of this sub-section within a period which shall not be later than the date of the first annual general meeting of the company held, within the period specified under sub-section (1) of Section 96, after three years from the date of commencement of this Act.]
Provided also that, nothing contained in this sub-section shall prejudice the right of the company to remove an auditor or the right of the auditor to resign from such office of the company.]
(3) Subject to the provisions of this Act, 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.
(4) The Central Government may, by rules, prescribe the manner in which the companies shall rotate their auditors in pursuance of sub-section (2).
Explanation.—For the purposes of this Chapter, the word “firm” shall include a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008 .
(5) Notwithstanding anything contained in sub-section (1), in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, the Comptroller and Auditor-General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of one hundred and eighty days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting.
(6) Notwithstanding anything contained in sub-section (1), the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within thirty days from the date of registration of the company and in the case of failure of the Board to appoint such auditor, it shall inform the members of the company, who shall within ninety days at an extraordinary general meeting appoint such auditor and such auditor shall hold office till the conclusion of the first annual general meeting.
(7) Notwithstanding anything contained in sub-section (1) or sub-section (5), in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and partly by one or more State Governments, *the first auditor shall be appointed by the Comptroller and Auditor-General of India within sixty days from the date of registration of the company and in case the Comptroller and Auditor-General of India does not appoint such auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next thirty days; and in the case of failure of the Board to appoint such auditor within the next thirty days, it shall inform the members of the company who shall appoint such auditor within the sixty days at an extraordinary general meeting, who shall hold office till the conclusion of the first annual general meeting.
(8) Any casual vacancy in the office of an auditor shall—
(i) in the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within thirty days, but 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;
(ii) in the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-General of India within thirty days:
Provided that in case the Comptroller and Auditor-General of India does not fill the vacancy within the said period, the Board of Directors shall fill the vacancy within next thirty days.
(9) Subject to the provisions of sub-section (1) and the rules made thereunder, a retiring auditor may be re-appointed at an annual general meeting, if—
(a) he is not disqualified for re-appointment;
(b) he has not given the company a notice in writing of his unwillingness to be re-appointed; and
(c) a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed.
(10) Where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company.
(11) Where a company is required to constitute an Audit Committee under section 177, all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee.
*Responsibility to Inform C&AG
Amendment
5. Substituted by Companies (Removal of Difficulties) third Order Dated 30th June, 2016.
In section 139, sub-section (2), for the third proviso.
“Provided also that 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:”
the following proviso shall be substituted, namely:-
“Provided also that every company, existing on or before the commencement of this Act which is required to comply with the provisions of this sub-section, shall comply with requirements of this sub-section within a period which shall not be later than the date of the first annual general meeting of the company held, within the period specified under sub-section (1) of Section 96, after three years from the date of commencement of this Act.”.
6. Omitted by the Companies (Amendment )Act,2017– Amendment Effective from 7th May 2018
Original Omitted Content- Provided that the company shall place the matter relating to such appointment for ratification by members at every annual general meeting:
Exceptions/ Modifications/ Adaptations
1. In case of Specified IFSC Public Company– In fourth proviso to sub section (1) of section 139, for the words “ fifteen days” read as “ thirty days”. – Notification Dated 4th January, 2017.
2. In case of Specified IFSC Public Company– All provisos to sub section (2) of section 139 shall not apply. – Notification Dated 4th January, 2017.
3. In case of Specified IFSC Private Company- In fourth proviso to sub section (1) of section 139, for the words “fifteen days” read as “thirty days”. – Notification Dated 4th January, 2017.
4. In case of Specified IFSC Private Company- All provisos to sub section (2) of section 139 shall not apply. – Notification Dated 4th January, 2017.
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