Re-Appointment & Rotation of statutory Auditors

RE-APPOINTMENT OF AUDITOR

After completion of tenure of 5 consecutive years the auditor may be re-appointed by complying with the provisions of section 139(9) which states that subject to the provisions of sub-section (1) & the rules made thereunder, a retiring auditor may be re-appointed at an annual general meeting, if-

• Auditor is not disqualified for re-appointment.
• He has not given the company a notice in writing of his unwillingness to be re-appointed
• A special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed.

Does Re-APPOINTMENT or RATIFICATION of auditor at AGM require obtaining written consent, certificate and filing of form ADT-1 ?

• As per 2nd,3rd & 4th proviso to section 139(1) consent, certificate and filing of form is required for appointment. Since as per explanation to section 139(1) appointment includes re-appointment
• So The documentation & filing of form is also required at the time of re-appointment but Ratification does not require filing of ADT-1 but it will be a better practice if certificate of disqualification is obtained even in case of ratification.

Procedure

The procedure for re-appointment of Auditor shall more or less be same as both, appointment & re-appointment are governed through provisions of Section 139(1). However, following additional things shall be kept in mind :-

• Provisions of section 139(9)
• and Provisions relating to rotation of auditors

ROTATION OF AUDITORS

1. As per section 139(2) no listed company or companies as prescribed shall appoint or re-appoint :-

• Individual as auditor for more than one term of 5 consecutive years; and
• An audit firm as auditor for more than two terms of 5 consecutive years

Note: 1. Break in the term for a continuous period of 5 years will be considered as fulfillment of criteria of rotation. (explanation 2 to rule 6(3)(ii)).

2. 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(rule 6(3)(i))

Cooling period: – 5 years from completion of tenure as said above.

OTHER PERSONS WHO CANNOT BE APPOINTED AS AUDITOR:-

• Firm having a common partner 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 (1st proviso to section 139(2)).
• 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(rule 6(3)(ii)).
• “same network” includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control (explanation 1 to rule 6(3)(ii))
• 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.
• Companies prescribed (rule 5):-
• Following companies excluding one person companies and small companies:-
• Unlisted public companies having paid up capital of Rs.10 crore or more;
• Private limited companies having paid up capital of Rs. 20 crore or more;
• Companies having paid up capital less than as mentioned above, but having public borrowings from financial institutions, banks or public deposits of rupees 50 crore or more.

Note :- Rotation of auditors does not apply to dormant companies(proviso to rue 6 of Companies(Miscellaneous) rules, 2014)

Manner of rotation:- to be prescribed by way of rules(section 139(4) read with rule)

Recommendation of name:-

• The procedure depends upon whether audit committee is required to be constituted or not.
• If constitution required then the Committee shall recommend to the Board the name of the auditor who may replace the incumbent auditor on expiry of his term.
• Board shall consider the same and make its recommendation to the members. In cases where committee not required then the Board shall itself recommend to the members.

Transitional period:-For companies existing on the commencement of this act, 3 years from such commencement (2nd proviso to section 139(2) 

SPECIAL RIGHTS TO SHAREHOLDERS

As per section 139(3) members have the following rights after passing a resolution in their meeting:-

• In case of the audit firm, the auditing partner and his team shall be rotated at such intervals as may be decided.
• Audit shall be conducted by more than an auditor.

CASUAL VACANCY

• As per section 139(8) any casual vacancy, shall be filled by the Board within 30 days.
• If the vacancy has arisen due to resignation of auditor then such appointment shall also be approved by the company at a general meeting convened within 3 months of the recommendation of the Board.

Instances of casual vacancy:-

• Death
• Resignation
• Disqualification –

If an existing auditor gets disqualified under Section 141 then he shall inform the company and the situation will be treated as casual vacancy (Section 141(4))

Failure of ratification at AGM –

In case the ratification resolution fails at the AGM of company then this also tantamount to casual vacancy(explanation to rule 3).

Tenure: –

Till conclusion of forthcoming annual general meeting.

Remuneration: –Section 142 deals with remuneration of auditor.

• Section expressly empowers the shareholders to fix the remuneration except in case of 1st auditor.
• The law is silent for fixing remuneration for auditor being appointed in casual vacancy
• since the law being silent and going with the purposeful interpretation of law the remuneration can be decided by the Board as the appointing authority is the Board itself moreover section 224(8) of Companies Act, 1956 also enumerated the same principle.
• However, this shall not be the case where casual vacancy has arisen due to resignation.

Does appointment of auditor in casual vacancy require obtaining written consent, certificate and filing of ADT-1 ?

• On reading section 139(8) prima facie it seems that the aforesaid is not required to be done, but since an auditor is appointed by the board in place of existing auditor.
• Regulator (ROC) should be intimated of the same and consent, certificate should also be obtained so as to prove that board has acted diligently.

Procedure for appointment of auditor in casual vacancy

• Intimate the proposed auditor(s) regarding the intention of appointing him/it as auditor and ask whether he/ it is eligible and not disqualified to be appointed as auditor of the company.
• Obtain consent & certificate from auditor.
• If Audit Committee required to be constituted under section 177, then obtain its recommendation (Section 139(11)).
• Call Board meeting.
• Approve the appointment of auditor in casual vacancy at the 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.

Procedure – where casual vacancy arises due to resignation of existing auditor

• Intimate the proposed auditor(s) regarding the intention of appointing him/it as auditor and ask whether he/ it is eligible and not disqualified to be appointed as auditor of the company.
• Obtain consent & certificate from auditor.
• If Audit Committee required to be constituted under section 177, then obtain its recommendation (Section 139(11)).
• Call Board meeting for the purpose of following:-
  • Appointment of auditor in casual vacancy.
  • Considering that the qualification & experience are commensurate with the size & operations of the company.
  • Recommending the members to approve the appointment.
  • Calling of EGM(to be held within 3 months from date of Board meeting).
  • Auditor appointment 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 of EGM(since the appointment is not final until approval of members).

RESIGNATION OF AUDITOR

• As per section 140(2) the Auditor who has resigned from the company shall file within a period of 30 days from the date of resignation, a statement in the prescribed form with the company and ROC indicating the reasons and other facts as may be relevant with regard to his resignation in form ADT-3(to be attached in form GNL-2 as per MCA circular 09/2014 dated 25th April, 2014).
• If the auditor does not comply with these requirements, he or it shall be punishable with fine which shall not be less than 50,000/- rupees but which may extend to 5,00,000/-.
• After resignation the provisions of casual vacancy shall be triggered which has been explained above.

Conditions for audit committee (section 179 read with rule 6 of Companies (Meetings of Board and its Powers) Rules, 2014):-

• Listed Companies.
• In case of Public companies with a paid up capital of Rs. 10 crore or more.
• If the Public companies having turnover of Rs. 100 crore or more.
• Public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs. 50 crore or more.

Conditions for rotation of auditors (section 139(2) read with rule 5):-

• Listed Companies.
• In case the Public companies having paid-up capital of Rs. 10 crores or more.
• Private limited companies having paid-up capital of Rs. 100 crore or more.
• All companies having paid-up capital of below the threshold limit mentioned above, but having public borrowings from financial institutions, banks or public deposits of INR 50 crore or more.

Companies to which audit committee applies but not rotation:-

• Public companies having turnover f more tan INR 100 crores but paid-up capital less than Rs. 10 crores.
• In case Public companies which have issued debentures or have borrowed money from other than bank/financial institution in excess of INR 50 crores.

Companies to which rotation applies but not audit committee:-

• Private companies having paid up capital of INR 100 crore or more.
• In case of Private companies which have borrowed money from financial institutions/banks in excess of Rs. 50 crores.

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