Updated by Pooja Dhiman and Janvi Gupta as on October 29, 2020
Indian chartered accountants are known worldwide for their higher understanding and financial skills. Prime Minister Narendra Modi had once referred chartered accountants as “big pillar” of the Indian economy and their services to the nation are deeply valued.
Pursuant to the provision of Section 141 (1) of the Companies Act, 2013 a person or a firm shall be eligible for appointment as an auditor of a company only if he is a chartered accountant or majority of partners of the firm is a chartered accountant and practising in India. We have summarised here as few aspects relating to appointment of auditor, tenure, filling up casual vacancy, rotation etc.:
1.1 I have just incorporated a Company, when do I need to appoint the first Auditor of the Company and how?
The First Auditor shall be appointed by the Board within a period of 30 days from the date of registration (incorporation) of Company. E-form ADT-1 is required to be filed within 15 days from the date of appointment.
Note: The governing law, the Companies Act, 2013 (the “Act”) nowhere specifies that the first Auditor shall be appointed at the first Board Meeting of the Company, it only mandates to appoint the Auditor within 30 days from the incorporation. Having said this, in general practice the first Auditor is appointed at the first Board Meeting.
1.2 What if the Board is not able to appoint the first Auditor within 30 days of incorporation?
If the Board fails to appoint such Auditor, then it shall inform the members of the Company about the same. The members shall within a period of 90 days from date of incorporation, at an extraordinary general meeting, appoint the first Auditor of the Company.
1.3. What would be the tenure of office of the first Auditor?
The first Auditor, appointed as above, shall hold the office till the conclusion of the first Annual General Meeting of the Company.
2.1 What is the term of appointment of subsequent Auditor under Companies Act, 2013?
The subsequent Auditor i.e. appointed after the completion of tenure of first Auditor at the first Annual General Meeting of the Company, shall hold the office from the conclusion of the first Annual General Meeting till the conclusion of sixth Annual General Meeting and thereafter till the conclusion of every sixth meeting, so on and so forth.
However, as per Section 139(2), certain Companies cannot continue with the same auditor after expiry of one term (in case of individual) or two terms (in case of firm) of five years. We have illustrated the concept as follows:
Please note that one person companies and small companies are excluded from the above category.
2.2 What is the term of appointment of Auditor for specified class companies under the Companies Act, 2013?
The subsequent Auditor i.e. appointed after the first Auditor for specified class of companies shall hold the office:
Individual: For one term of 5 years and then a cooling period of 5 years is to be provided i.e. can be re-appointed after a break of 5 years.
Firm: For two terms of 5 years i.e. 10 years and then a cooling period of 5 years is to be provided i.e. can be re-appointed after a break of 5 years.
2.3 Can the Auditor be appointed for a period less than 5 years?
The terms for appointment of Statutory Auditors is defined under Section 139(1), which clearly stipulates that the auditor appointed shall hold office till the conclusion of sixth AGM from the AGM in which he is appointed. Thus, one can opine that the auditor cannot be appointed for one term, consisting of period less than or more than five years. Even if a Company has previously appointed an auditor for a term lesser than 5 years, it shall still be treated as one full term and the cooling period under Section 139(2) shall be required for specified companies.
If the auditor is appointed to fill in the casual vacancy arisen due to vacancy of office of previous years, then, the period he serves to complete the tenure of the previous auditor (i.e. till the conclusion of ensuing AGM) shall not be counted as term of this auditor and he can be appointed for a fresh term of 5 consecutive years in the same Company.
2.4 Is e-form ADT-3 required to be filed after completion of the tenure of the Auditor?
The purpose of e-form ADT-3 is to intimate the ROC about the termination of the office as a result of resignation of the Auditor before the expiry of his/her tenure. The Auditor who has resigned, is required to file e-form ADT-3 within a period of 30 days from the date of resignation. Thus, e- form ADT-3 is not required in following situations:
3.1 What can be the possible instances when the casual vacancy arises?
Casual Vacancy is vacancy in the office of auditor before the expiry of the tenure for which he was appointed to that office. The grounds of casual vacancy can be resignation, death or disqualification of the Auditor (this is an inclusive list).
3.2 What is the manner of appointment of new auditor, if casual vacancy of the auditor arises in the Company?
|Resignation of the Auditor||Other than the resignation of the Auditor|
Casual Vacancy to be filled by the Board within a period of 30 days. This appointment is subject to the approval of shareholders of the Company.
To be filled by the Board within a period of 30 days.
The appointment to be the approved by the members (in EGM or AGM, as the case may be) within a period of 3 months from the date of appointment.
|No member’s approval is required.|
The Auditor who has resigned, is required to file e-form ADT-3 within a period of 30 days from the date of resignation.
|No e-form ADT-3 is required to be filed.|
E-form ADT-1, towards appointment, is required to be filed within 15 days from the date of appointment, i.e. General Meeting at which the appointment recommended by the Board, is confirmed by the members of the Company.
E-form ADT-1, towards appointment, is required to be filed within 15 days from the date of appointment, i.e. Board meeting held to fill casual vacancy.
3.3 What would be tenure of auditor appointed in casual vacancy?
Auditor appointed for filling the casual vacancy shall hold the office till the conclusion of the ensuing Annual General Meeting.
3.4 Whether the form filing is required at every type of appointment of auditor?
Yes, for every type of appointment i.e. first auditor, casual vacancy or re-appointment at AGM, the Company shall file e- form ADT-1 for such appointment. In case the retiring auditor is reappointed, the Company shall report the prior period served by the auditor in Form ADT-1.
3.5 Is Form ADT-3 is required to be filed in case of the death of an Auditor?
No, e-form ADT-3 is not required to be filed in case of the death of an Auditor.
4.1 Is the concept of rotation of auditor applicable to every company?
No, the provisions pertaining to ‘Rotation of Auditors’ are applicable only on to the specified companies as mentioned under earlier in this article.
4.2 As of what date should the limits as applicable on specified class of companies be reckoned for rotation of an auditor i.e. whether it should be checked at the beginning of financial year or during the financial year or any other such date?
The law specifies no date at which such limits should be reckoned (say end of financial year/ audit of accounts/ during the year, etc.) Thus, one must be prudent and follow conservative approach. Further, as soon as the concept of rotation of auditor becomes applicable on the Company i.e. the Company crosses the threshold limit as specified in the Act during the tenure of an auditor, that auditor will continue his office till the conclusion of AGM of the Company until which he was appointed (per previous term), however, thereafter he shall not be re-appointed in the same Company until 5 years. A new auditor shall be appointed by the Company at the AGM at which the tenure of the existing auditor expires/ is completed.
5.1 The tenure of the retiring auditor is over and he is eligible for reappointment, however, the Company does not want to appoint him. Is there any special provision for this?
If the one term of the auditor is completed, it is the Company’s wish whether or not to reappoint the retiring auditor. Per the Act, subject to Section 139(1) and the rules made thereunder, a retiring auditor may be re-appointed at an annual general meeting, if—
5.2 What if no resolution was successfully passed at AGM to appoint or reappoint an auditor?
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.
6.1 We have appointed the Auditor of the company for a term of 5 years. However, some differences have crept in and we want to remove the existing Auditor? He is not resigning, nor giving audit report, what to do?
The mechanism for removal of a Statutory Auditor of the Company before expiry of the term appointed under the Act has been provided under section 140 of the Act read with Rule 7 of Companies (Accounts and Audit) Rules, 2014.
File application in e-form ADT-2 along with the grounds of removal and other details, for Central Government approval (at present, the powers have been delegated to the jurisdictional Regional Director) within 30 days of the resolution passed by the Board.
Special resolution to be passed by the members of the Company at the general meeting, to be held within 60 days of receipt of approval of the Central Government.