APPOINTMENT OF STATUTORY AUDITORS AND THEIR SERVICES UNDER THE COMPANIES ACT, 2013
- Section 139, 141,142, and 144 of the Companies Act, 2013 and the Companies (Audit and Auditors ) Rules, 2014 deal with the appointment of Auditors, the criteria to become Auditors, and payment of their remuneration, etc. The new Act has not simplified the process.
- It is for us to understand the complexities involved and to a possible extent present the same in a simplified manner.
- Section 139 starts with the appointment of First Auditors and Rule3 (7) deals with the appointment of subsequent auditors.
- Payment of remuneration is dealt with in Section 143 and the duties and responsibilities of the Auditors are dealt with in Section 144.
- Section 141 deals with the criteria to become a Statutory Auditor. Rule 10 gives some explanations to Section 141 who is not eligible to become Auditors.
- Rule 3 deals with the manner and selection of Auditors by the Audit committee of certain classes of Companies. Restriction on terms of office of a Statutory Auditor is dealt with in Section 139 and Rule 5.
- After studying the Act and the Rules, I have made an attempt to simplify the legal aspects of appointments, manner of appointments, criteria of appointments, payment of remunerations, casual vacancy appointments, services rendered concerning the Auditors.
1. Appointment of a Statutory Auditor
A. Appointment of Auditors by Companies (other than Government Owned/controlled Companies )
- Section 139(6) reads that the First Statutory Auditors shall be appointed within 30 days of registration of the Company by the Board so as to hold office from the conclusion of the First Board Meeting till the conclusion of the First AGM
- the Auditors shall be appointed by the members in the First Annual General meeting so as to hold office from the conclusion of the First Annual General Meeting till the conclusion of the Sixth AGM.
- As per Rule 3 (7), all existing Companies registered on or before 31.3.2014 and which are not supposed to appoint the First Auditors shall appoint Auditors in the forthcoming AGM so as to hold office from the conclusion of that meeting till the conclusion of the sixth AGM.
- If the Board fails to appoint the first Auditor, it shall inform the members who shall appoint an Auditor within 90 days in an EGM and the appointed Auditor shall hold office till the conclusion of the next Annual General Meeting.
- In every Annual General Meeting, the appointment of Statutory Auditors should be ratified. If ratification of appointment is not made by the members in the AGM.
- The Board shall appoint another individual or Firm as Auditors as per procedures laid down under the Act.
Note: Rule 3(7) states under the heading Explanation “If ratification of appointment is not made by the members in the Annual General Meeting, the Board shall appoint another individual or Firm as Auditors as per procedures laid down under the Act.’
This is contrary to the provisions contained in Section 139(10) wherein it states if no auditor is appointed or reappointed, the existing auditor shall continue to be the auditor of the Company.
B. Appointment of Auditors in Government owned/controlled Companies
- Controller and Auditor General of India shall appoint the first Auditor within sixty days from the date of registration of the Company. If the Controller and Auditor General of India fails to appoint the Auditor within the above period,
- Board of Directors shall appoint the Auditor within the next thirty days, failing which, it shall inform the members who shall appoint the Auditor within 60 days in an EGM.
- The subsequent Auditors shall be appointed by the CAG of India within 180 days from the commencement of the financial year and the appointed Auditor shall hold office till the conclusion of the next AGM.
2. Manner of Appointment of Statutory Auditors and Payment of Remuneration
i. Procedure to appoint Statutory Auditors in the case of Companies not having an Audit Committee
a. An Auditor matching his qualification and experience with the size and requirements of the Company shall be chosen by the Board.
b. The Board shall then see whether there are any orders or pending proceedings relating to professional matters of conduct against the proposed Auditor before ICAI or any other competent Authority.
c. The Board has to see whether he satisfies the eligibility norms specified under Section 141.
d. The Board has to obtain a declaration from the Auditor that he is eligible to issue a certificate under rule 4(1).
Note: Asper Rule 4(1), the Company has to get the eligibility certificate after the Auditor is appointed in the AGM. What if the management finds out if the Auditor is ineligible to issue the certificate after he is appointed.
The Board should then take the pains to identify a new Auditor in replacement of the appointed Auditor. To avoid such a scenario, it is suggested that clause (d) be followed.
e. The Board has to finalize the remuneration payable to the Auditor in consultation with him and pass the resolution in the Board subject to the approval of the shareholders in the AGM.
Section 142 requires the Company to quantify the remuneration in the General Meeting.
Note: Hitherto, under the Companies Act, 1956, The Company had the privilege to appoint Auditors in the AGMs on a remuneration that could be decided by the Board at a later date. That era is over.
f. With the Board’s consent on the Appointment as well as on the remuneration, the intended resolution to be passed could be mentioned in the AGM NOTICE itself. Here is the model resolution.
“Resolved that in accordance with the provisions of Section 139, 141 and 142 of the Companies Act, 2013 read with rule 3(7) of the Companies (Audit and Auditor) Rules, 2014, M/s.ABC & Co, Chartered Accountants, Bangalore is and are hereby appointed as Statutory Auditors of the Company so as to hold the said office from the conclusion of this meeting till the conclusion of the sixth AGM on a consolidated remuneration of Rs.22,000 (Rupees twenty-two thousand four hundred and seventy-two only) for each Audit period unless otherwise revised subsequently at the time of ratifications in the subsequent Annual General Meetings”.
“Resolved further that M/s ABC & Co, Chartered Accountants, Bangalore shall in addition to the above remuneration be eligible to reimbursement of all expenses incurred during the course of Audit and availing all such facilities as are extended to them during Audit”.
g. The Company shall file an E Form in ADT–1 intimating the Registrar about the appointment of Auditors within 15 days from the date of his appointment
h. Company shall also inform the Auditors about his appointment in the AGM within 15 days of his appointment.
ii. Procedure to appoint Auditors in the case of Companies having an Audit Committee
i. Instead of the Board, the Audit Committee has to go through the process of selection of Auditors as mentioned in Clause (a) to (e) and then recommend to the Board which in turn recommends to the Members for consideration in the AGM.
ii. If the Board disagrees with the recommendation of the Audit Committee, it shall refer back again to the said Committee citing the reason for disagreement and recommending reconsideration.
iii. In case the Audit committee decides not to reconsider the recommendations made by the Board, the Board shall then record the reason for disagreement and send its own recommendations for consideration to the members to decide in the Annual General Meeting.
3. Conditions and Eligibility Criteria for Appointment of Auditors
The Auditor appointed by the Members or by the Board as the case may be shall submit a certificate stating that
i. he is eligible for appointment and is not disqualified for appointment under the Companies Act, 2013, the chartered Accountants Act, 1949, and the rules and regulations made thereunder.
ii. The proposed appointment is as per the terms provided under the Act.
Note: Section 141 and rule 10 list out the eligibility criteria for the Auditors and Section 144 list out services that he should not render either directly or indirectly while serving as Auditor
iii. the proposed appointment is within the specified limits laid under the Act.
iv. 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.
4. Filling up of Casual Vacancy caused due to various reasons in the case of Companies not subject to Audit by the Comptroller and Auditor General of India
a. In the case of a casual vacancy caused by the resignation of the Auditor, the following procedures have to be followed.
i. The Board of Directors shall approve the filling up of the casual vacancy within thirty days and then recommend such appointments to the members.
ii. Members in an Extra-Ordinary General Meeting shall confirm and approve the vacancy filled up by the Board on its recommendations within three months.
b. In the case of a casual vacancy caused by any other reason other than the resignation of the Auditor, the Board of Directors has the powers to fill such a vacancy within thirty days.
c. If the Companies have Audit Committee, filling up of casual vacancy shall be done after taking into account the recommendation of such a Committee in addition to the recommendation of the Board.
The Appointed Auditor shall hold office till the conclusion of the next Annual General Meeting
5. Filling up of Casual Vacancy in the case of Companies subject to Audit by the Auditor-Controller General of India
i. The Comptroller and Auditor General of India shall fill up the casual vacancy within thirty days.
ii. In case the casual vacancy is not filled as mentioned in (i) above, the Board of Directors shall fill such vacancy within the next 30 days.
6. Reappointment of either the retiring Auditor or some other Auditor in the place of the retiring Auditor.
As per Section 139(9) of the Act, the retiring Auditor shall be reappointed at an Annual General Meeting if
i. retiring Auditor is not disqualified for reappointment
ii. he has not given the company a notice of unwillingness to be reappointed.
iii. A special resolution is passed at the Annual General Meeting appointing some other auditor or providing expressly that he shall not be reappointed.
iv. The retiring Auditor shall continue to remain as Auditor till the end of this term viz., the conclusion of the sixth Annual General Meeting if no other auditor is appointed or reappointed.
Note: This is contrary to rule 3(7) as mentioned earlier.
7. Services to be rendered by the Statutory Auditor
i. The Auditor shall conduct the Statutory Audit the manner in which it is laid down under Section 143.
ii. Auditor in his report shall specify all matters as are enumerated in Section 143 and Rule 11.
iii. In case of fraud, the Auditor shall report in the manner laid under Rule 13.
iv. Section 146 requires the Auditor to attend either by himself or through his authorized representative who shall be qualified to be an Auditor at all general meetings and he shall have the right to be heard on any part of the business that concerns him. (However, the Company may exempt the Auditor in complying with this provision)
8. Services not to be rendered in the capacity as Statutory Auditor
The auditor shall not render either directly or indirectly to the Company, or its Holding or Subsidiary Company the following services.
a. Accounting and Bookkeeping service.
c. Design and Development of any financial information system
d. Actuarial Services
e. Investment advisory services
f. Investment Banking Services
g. Rendering of outsourced financial services
h. Management Services
Any other services as may be prescribed by the Government.
8. Restrictions on Term of Office that a Statutory Auditor can hold applicable only to a certain class of Companies
The term of office of an Individual Auditor shall be for five years and for a firm of Auditors shall be for two consecutive terms of five years for the following classes of Companies.
- It included all listed Companies
- All unlisted Public Companies have a Share Capital of Rs.10 Crores or more.
- It included all Private Companies having a capital of more than Rs.20 Crores
- All Companies do not fall under clauses (b) and (c)but have Public borrowings from financial institutions, banks, or public deposits of Rs.50 Crores or more.
However, the Act has given time to comply with the above provisions by the aforesaid companies within a period of three years viz., on or before 31–3–2017.
- In effect, these companies have to comply with the said provisions in the AGM to be held on or before 30–9–2016 as technically speaking there will be a violation of Section 139
- if they continue as Auditors beyond 31–3–2017… as the act says ‘within three years from the date of commencement of this Act .maybe the Government may issue a clarification in this regard in future.
10. APPOINTMENT OF FIRST AUDITOR
- As per section 139(6), the first auditor of the company shall be appointed by the Board within 30 days of Incorporation. In case of the Board’s failure, an EGM shall be called within 90 days to appoint the first auditor.
- The law is silent regarding when this time limit of 90 days be reckoned, it is better to take a stricter view and interpret that the 90 days limit starts from Incorporation rather than the expiry of 30 days(i.e. failure of Board) from it.
Tenure: – Till the conclusion of the 1st annual general meeting.
Remuneration: – As per proviso to section 142(1) remuneration of the first auditor can be decided by the Board.
11. Does the appointment of 1st auditor require obtaining written consent, certificate, and filing of form ADT-1?
- The appointment of the first auditor is governed through section 139(6) which starts with a non-obstante clause [notwithstanding anything contained in sub-section (1)] and it is sub-section (1) which requires obtaining consent & certificate from the auditor and filing of form ADT-1 with ROC.
- Interpretation of “notwithstanding anything contained.”:- As per the Supreme court, the non-obstante clause is used to avoid the operation and effect of all contrary provisions. In case of any departure between the non-obstante clause and other provisions, the no-obstante clause will prevail.
- Since section 139(6) does not speak anything contrary to section 139(1) as far as obtaining consent, certificate, and filing of form is concerned therefore it can be interpreted that ADT-1 should be filed with ROC for the first auditor also.
- Intimate the proposed auditor(s) regarding the intention of appointing him/it as an auditor and ask whether he/ it is eligible and not disqualified to be appointed as auditor of the company.
- Obtain consent & certificate from the auditor.
- If the audit committee is required to be constituted under section 177, then obtain its recommendation (Section 139(11)).
- Call Board meeting.
- Approve the appointment of an auditor at the first Board Meeting.
- Intimate the auditor and file with ROC form ADT-1(to be attached in form GNL-2 as per MCA circular 09/2014 dated 25th April 2014) within 15 days.
12. APPOINTMENT OF AUDITOR AT 1ST AGM
As per section 139(1), every company shall appoint at its 1st annual general meeting an individual or a firm as an auditor of the company who shall hold office who shall hold office from the conclusion of that meeting till the conclusion of its sixth AGM and thereafter till the conclusion of every sixth AGM meeting
Tenure subject to ratification:- The tenure of 5 consecutive years is subject to ratification by shareholders at every AGM.
Remuneration: –As per section 142(1) remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein.
Manner & Procedure for selection to be governed through rules:- it is prescribed in rule 3, explained hereunder,
1. Consideration of the appointment – The Board or the Audit Committee (where it is required to be constituted) shall consider the qualifications, experience of the auditor, and whether the aforesaid attributes are commensurate with the size and requirements of the company.
Further regard should also be given to professional matters of conduct against the proposed auditor before the ICAI, Court, or any competent authority.
2. Recommendation of the name –
The procedure depends upon whether the audit committee is required to be constituted or not.
- Constitution of audit committee required: In this case, the committee shall recommend the name of the auditor to the Board which it agrees with the recommendation, will further recommend it to the members. If the Board does not so agree, then it shall refer back the recommendation to the committee which may reconsider its recommendation,
However, if the committee decides not to do so then the Board shall record reasons for its disagreement with the committee and send its own recommendation for consideration of the members.
- Audit Committee not required: The committee shall recommend the name of the auditor to the members.
- The written consent and certificate from the auditor:– As per the 2nd proviso to section 139(1) auditor has to give written consent to become an auditor of the company & a certificate stating that appointment is in accordance with conditions prescribed.
Contents of the certificate (rule 4(1) of Companies (Audit and Auditor) Rules, 2014) are:-
- The person being appointed 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.
- The proposed appointment is as per the term provided under the Act.
- The proposed appointment is within the limits laid down by or under the authority of the Act.
- The list of proceedings pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.
- The certificate should also state that the auditor is eligible and not disqualified for appointment as per section 141(requirement of 3rd proviso).
Intimation to Auditor & ROC:-
The company shall inform the auditor regarding the appointment and also file a form ADT-1 to ROC within 15 days of the meeting in which the auditor is appointed.
1. Intimate the proposed auditor(s) regarding the intention of appointing him/it as an auditor and ask for the following information and documents:-
- Qualification, experience, and matters of professional conduct pending before ICAI, Court, or any other competent authority.
- Consent to become an auditor.
- Certificate (contents discussed above)
2. Call Board meeting for the purpose of following:-
- Needed to Consider information and documents received in point 1.
- Considering that the qualification & experience are commensurate with the size & operations of the company.
- Recommending the name of the auditor to the members.
- Calling of AGM.
3. Convene the AGM and get the Ordinary resolution appointing the auditor passed at the meeting.
4. Intimate the Auditor and file with ROC form ADT-1(to be attached in form GNL-2 as per MCA circular 09/2014 dated 25th April 2014) within 15 days.
Note: – In case the Company is required to constitute the Audit Committee, then the work of consideration and recommendation vests with it. The concept of the same has been discussed above.
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