By Ayushi Budholia
Published on: May 10, 2022 at 20:02 IST
After Independence, the first Companies Act introduced in India was the Companies Act, 1956. It was enacted on the recommendations of the Bhaba Committee set up in 1950 with the object to consolidate the existing corporate laws and to provide a new basis for corporate operation in independent India. This Act repealed the already existing India Companies Act, 1913.
In the present scenario, the companies are governed by the Companies Act, 2013. The Section 2 (20) of the Act defines company as –
“(20) “company” means a company incorporated under this Act or under any previous company law;”
Every company is established with certain goals which it wishes to achieve in the long run. The achievement of those goals requires the company to carry on the daily operation of the organization.
There are a number of transactions in which a company enters while conducting its business. With increased number of transactions, the company faces the risk of becoming a victim of some fraudulent activities, entering wrong transactions in the books of account, etc.
These risks are prevented by the auditor of the company. He not only protects the company from fraudulent activities and assesses the financial records of the company but also helps the company in complying with the tax laws.
An auditor is a trained individual who reviews, checks, and verifies the accuracy and genuineness of financial records maintained by companies. These individuals also help companies ensure that they comply with Indian tax laws and protect businesses from fraud. They also highlight discrepancies in businesses’ financial documents and accounting methods and help maintain overall compliance. Any auditor who works as an employee of an organisation is referred to as an internal auditor. The role of an internal auditor in a company is to help the business stay compliant and manage its taxes effectively.
The Section 139 to 148 (Chapter X) of the Companies Act, 2013 deals with the Audit and Auditors of the company. It lays down the provisions related to the appointment, removal and resignation of directors, eligibilities, qualification and disqualification of directors, remuneration of directors, power and duties of directors, etc.
APPOINTMENT OF AUDITORS
The provision relating to the appointment of auditors is given under Section 139 of the Companies Act, 2013.
- Clause 1 of Section 139 of the Act
The Section 139 (1) of the Companies Act, 2013 states that –
“(1) 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:
Provided that the company shall place the matter relating to such appointment for ratification by members at every annual general meeting:
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:
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 re-appointment.”
According to this Section, the company should appoint an auditor in its first annual general meeting (AGM). The auditor shall hold the office from the conclusion of the first annual general meeting to the conclusion of the sixth annual general meeting.
According to this Section, the appointment should be made with the written consent of the auditor, and a certificate, which satisfy the criteria given under Section 141 of the Act should be obtained.
Further, once the appointment is made, a notice regarding such appointment shall be filed before the Registrar within fifteen days of such appointment.
- Clause 2 of Section 139 of the Act
The Section 139(2) of the Companies Act, 2013 states that –
“(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 reappointment 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:
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 subsection within 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.”
This Section prohibits the following categories of companies from appointing / re-appointing an audit firm for more than two terms of five consecutive years, and an individual auditor for more than one term of five consecutive years:
- listed companies;
- unlisted public companies having a paid-up share capital of INR 10 crores or more;
- all private limited companies having a paid-up share capital of INR 20 crores or more; and
- all companies (private and public) which do not meet the thresholds mentioned in (ii) and (iii) above, but have public borrowings from banks / financial institutions or public deposits of more than INR 50 crores.
- Clause 3 of Section 139 of the Act
The Section 139(3) of the Act states that members of a company can provide for following by passing a resolution:
(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.
A transition period of 3 years from the commencement of the Act has been prescribed for the company existing on or before the commencement of the Act, to comply with the provisions of the rotation of auditor.
- Clause 4 of Section 139 of the Act
This Section provides that the Central Government may, by rules, prescribe the manner in which the companies shall rotate their auditors in pursuance of sub-section (2).
- Clause 5 of Section 139 of the Act
This Section 139(5) states that –
“(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.”
This section provides that in case of a government company, the Comptroller and Auditor General of India shall appoint an auditor within 180 days of the commencement of the financial year, who shall hold the office till the conclusion of the annual general meeting.
- Clause 6 of Section 139 of the Act
This section provides that the Board of Directors shall within thirty days from the date of registration of company appoint an auditor for the company. In case the board fails to do so, it should immediately inform the members of the company about such failure. The members of the company are then responsible to appoint an auditor within ninety days of the receipt of such information.
- Clause 7 of Section 139 of the Act
This section provides that in case of a government company, the Comptroller and Auditor General of India shall appoint the first auditor within sixty days of the date of registration of the company. In case they fail to do so then it is the duty of the Board of Directors to appoint an auditor within next thirty days. In case the Board also fails, then the members shall appoint an auditor within next sixty days.
- Clause 8 of Section 139 of the Act
This Section provides that in case there is a casual vacancy in a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor General of India, the vacancy is to be filled by the Comptroller and Auditor General of India within thirty days. However, if they fail to fill the vacancy, then the Board of Directors shall fill the vacancy within next thirty days.
Furthermore, if the vacancy is in a company whose accounts are not subjected to audit by an auditor appointed by the Comptroller and Auditor General of India, then the Board of Directors shall fill the vacancy within thirty days.
- Clause 9 of Section 139 of the Act
This section states that –
“(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.”
- Clause 10 of Section 139 of the Act
This section states that –
“(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”
- Clause 11 of Section 139 of the Act
This section states that –
“(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.”
An auditor has a very important role in the company. It assesses the financial records of the company, helps it in complying with the Indian tax laws, protect businesses from fraud. They also highlight discrepancies in businesses’ financial documents and accounting methods and help maintain overall compliance. For the appointment of an auditor, the provision of Section 139 of the Companies Act, 2013 is to be followed.
ABOUT THE AUTHOR
Ayushi Budholia is a third-year, B.A.LL.B Student of Lloyd Law College, Greater Noida.
Edited By: Advocate Ramsha Shaikh, Associate Editor at Law Insider
- Companies Act, 1956 (Act 1 of 1956). ↑
- Ministry of Corporate Affairs, “Report of expert committee on Company Law”. ↑
- Indian Companies Act, 1913 (Act VII of 1913). ↑
- Companies Act, 2013 (Act 18 of 2013). ↑
- Companies Act, 2013 (Act 18 of 2013), s. 2(20). ↑
- Vakil Search, “An Auditor’s Role In A Company” ↑
- Companies Act, 2013 (Act 18 of 2013), s. 139(1). ↑
- Companies Act, 2013 (Act 18 of 2013), s. 139(2). ↑
- Lexology, “Rotation of audit firms under the Companies Act, 2013 – a closer look”. ↑
- The Institute of Company secretaries of India, “AUDIT AND AUDITORS”. ↑
- Companies Act, 2013 (Act 18 of 2013), s. 139(4). ↑
- Companies Act, 2013 (Act 18 of 2013), s. 139(5). ↑
- Companies Act, 2013 (Act 18 of 2013), s. 139(9). ↑
- Companies Act, 2013 (Act 18 of 2013), s. 139(10). ↑
- Companies Act, 2013 (Act 18 of 2013), s. 139(11). ↑