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Auditor Selection Rules

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The Companies Act, 2013 lays down a precise framework for appointing auditors. Adhering to Section 139 and related rules is vital for smooth and compliant auditor appointments.

Key Aspects of Auditor Appointment Process:

  1. Initial Appointment:
  •    Every company must appoint an auditor during its 1st Annual General Meeting (AGM).
  •    The auditor serves from this AGM’s end to the conclusion of the 6th AGM.
  •    Subsequently, the auditor continues till the end of every 6th AGM.
  •    The auditor’s consent and certification are prerequisites before the appointment.
  1. Auditor’s Certificate Should Confirm:
  • No disqualification under the Companies Act, 2013, or Chartered Accountants Act, 1949.
  • Adherence to terms stipulated in the Act.
  • Within limits specified by the Act.
  • Disclose pending proceedings against the auditor/audit firm.
  1. Registrar Notification:
  • Notify the registrar using Form ADT-1 within 15 days of the appointment.
  1. Restrictions on Reappointment:

   – Certain companies can’t reappoint auditors:

  •   Listed/Unlisted Public Companies with PSC over Rs. 10 Crore/Rs. 50 Crore.
  •   Companies with public borrowings or deposits over Rs. 50 crore.

   – Individual auditor: No more than 1 term of 5 years.

   – Audit firm: No more than 2 terms of 5 years.

   – After completing the term, a 5-year gap is necessary for reappointment.

  1. Avoiding Common Partners:
  • An audit firm with common partners to a firm whose term ended the previous year can’t be appointed for 5 years.
  1. Multiple Auditors Required:
  • Audits should involve more than 1 auditor.
  1. Government Companies & C&AG’s Role:
  •  For Government Companies, C&AG appoints the auditor within 180 days of the fiscal year start.
  •  If C&AG fails, BOD appoints within the next 30 days.
  •  The retiring auditor can be reappointed under certain conditions.
  1. Casual Vacancy Filling:
  •   BOD/Government fills casual vacancies within 30 days.
  •    In case of an auditor resignation, company approval is needed within 3 months.
  •    In case of failure, C&AG/BOD to fill the vacancy within the next 30 days.
  1. Selecting and Appointing Auditors:
  •   Companies with Audit Committee: Committee assesses qualifications and recommends the auditor to  Board.
  •   Audit Committee not needed: Board recommends an auditor to members during AGM.
  •   Board agrees with Committee: Recommends auditor to members in AGM.
  •   Board disagrees with Committee: Sends back for reconsideration with reasons.
  •   Board and Committee disagreements: Board sends its own recommendation to members.
  1. Auditor Term and LLP Inclusion:
  •    The auditor chosen in AGM serves until the 6th AGM, with the appointment AGM counted as first.
  •    “Firm” includes limited liability partnerships under LLP Act, 2008.

Conclusion: 

  • The Companies Act, 2013 ensures transparent and accountable auditor appointments.
  • Following Section 139 and its rules leads to well-qualified auditors.
  • A solid grasp of the Act’s guidelines is essential for a seamless process.

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