Appointment of Auditors

Legal stipulations demand that an auditor be appointed to the company in its first annual general meeting. This is an annual exercise where a meeting is held every year with shareholders being the only people allowed to attend. In this meeting, the company also discusses directors report of private limited company which focuses on performance of the company for that financial year. 

The appointed auditor can be a firm or an individual. The term of an auditor expires at the end of the sixth annual general meeting; thus, section 139 (1) means that appointed auditors stay in their positions for five years. Independent auditors who served more than five years consecutively will not be reappointed but the audit firm may be reappointed for the next five consecutive years. 

The Companies (Audit and Auditors) Rules, 2014 lay down in Rule 4 that the auditor must give a written consent and certificate before he is appointed. The certificate must include the following details:

 - confirmation that the person or the firm is qualified to be an auditor. 

 - The particulars of any prosecution of the person or firm mentioned. 

 - A confirmation of appointments’ conformity to the legal provisions concerning the number of directors. 

This notice should be given within 15 days of the appointment. If at the annual general meeting no new auditor is appointed or reappointed then the existing auditor will remain in that position. The company will later in another meeting appoint an auditor to fill the slot that lacks an auditor because of the company not being able to do so. 

The first auditor for the non-government companies, for instance, has to be appointed not later than a month from the registration of the company. If the Board of Directors does not appoint the first auditor within this timeframe, the Board of Directors must notify the company’s members of this. The members will then appoint the first auditor at an Extraordinary General Meeting convened within not less than ninety (90) days. The first auditor appointed at this EGM will hold office until the AGM following the appointment of the auditor. 

Government Company

In case of an enterprise which is either wholly owned or managed by the government, the selection of the auditor is in the hands of the Comptroller Auditor General (CAG) for India. In case of a government company that has recently registered with the Registrar of Companies, the CAG has to appoint the first auditor within sixty days of the registration of the company. If the CAG does not appoint the first auditor fulfilling this requirement, then the Board of Directors gets 30 days to appoint the first auditor. In the same way, if the Board of Directors also does not make the appointment, according to the law, they have to declare this failure to the members of the company. The members will then be given 60 days to appoint the first auditor at an EGM of the Company. 

Re-appointment

Section 139(2) specifies the criteria for the re-appointment of auditors. A company is prohibited from re-appointing an individual auditor after they have completed a 5-year term. Such an individual is ineligible for re-appointment for the next 5 years following the end of their term.

On the other hand, an audit firm can be re-appointed for an additional five-year term. However, companies are restricted to re-appointing an audit firm only once. After serving two consecutive terms, the audit firm is no longer eligible for further re-appointment. It is essential to note that these provisions are specifically applicable to listed companies.

An auditor can be re-appointed only if the following conditions are met:

     - The auditor is not disqualified from serving as an auditor.

Vacancy

Section 139(8) in the Companies Act 2013 states how it is if a vacancy occurs. Any vacancy which is occurring in any place or company exceptionally excluding the vacancy where the auditors are selected by the CAG, it has to inform the Board of Directors for any casual vacancy within 30 days. If such a vacancy is as a result of the resignation of the auditor, then it has to be done in consultation with the Board of Directors. The Board will review the resignation at a general meeting that has to be held in not more than 3 months after the auditor had tendered their resignation. Resigning auditor continues to serve in that position until the General Meeting has been held. 

The circumstances under which a casual vacancy may be filled are either the death of an auditor or disqualification of an auditor among others. 

The rationale of such provisions lies in the prevention of having the auditor’s position thereby not occupied. Voluntary resignations may create a vacancy with the position filled by holding over to the next available meeting of the Board at which a new auditor might be appointed. However, under Section 140 of the under Companies Act, 2013, the resigning auditor remains in that position until he resigns from the position. An auditor can be appointed at the general meeting of the company that the existing auditor is resigning from. 

Disclaimer

The information provided in this blog is purely for general informational purposes only. While every effort has been made to ensure the accuracy, reliability and completeness of the content presented, we make no representations or warranties of any kind, express or implied, for the same. 

We expressly disclaim any and all liability for any loss, damage or injury arising from or in connection with the use of or reliance on this information. This includes, but is not limited to, any direct, indirect, incidental, consequential or punitive damage.

Further, we reserve the right to make changes to the content at any time without prior notice. For specific advice tailored to your situation, we request you to get in touch with us.