Auditor Selection Rules

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.

2. 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.

3. Registrar Notification:

• Notify the registrar using Form ADT-1 within 15 days of the appointment.

4. 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.

5. 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.

6. Multiple Auditors Required:

• Audits should involve more than 1 auditor.

7. 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.

8. 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.

9. 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.

10. 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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