Introduction:

In order to guarantee the correctness and legitimacy of a company's financial accounts, auditors are essential.  The appointment, tenure, rotation, and dismissal of auditors are governed by the Companies Act of 2013 and the Companies (Audit and Auditors) Rules of 2014.  These clauses seek to advance corporate governance, accountability, and transparency.

Along with pertinent sections and regulations, this page describes the steps and legal requirements for the appointment of auditors under the Companies Act, 2013.

1. Governing Provisions

The following provisions of the Companies Act, 2013 deal with auditor appointment:

  1. Section 139 – Appointment of auditors
  2. Section 140 – Removal and resignation of auditors
  3. Section 141 – Eligibility, qualifications, and disqualifications
  4. Section 142 – Remuneration of auditors
  5. Section 144 – Auditor not to render certain services
  6. Section 147 – Punishment for contravention of Companies (Audit and Auditors) Rules, 2014

2. First Auditor Appointment [Section 139(6)]

For businesses that are not government agencies:

  1. Within 30 days of incorporation, the first auditor must be appointed by the Board of Directors.
  2. The members must designate the auditor at an extraordinary general meeting (EGM) within ninety days if the Board is unable to do so.
  3. Until the first Annual General Meeting (AGM) is over, the initial auditor remains in office.

Regarding government businesses: [Section 139(7)]

  1. Within sixty days of the incorporation date, the first auditor is appointed by the Comptroller and Auditor General of India (CAG).
  2. The Board has 30 days to make an appointment if the CAG doesn't.
  3. The corporation must designate the auditor at an EGM within 60 days if the Board also fails.
  4. Tenure: Up to the first AGM's end.

3. Section 139(1): Appointment of Subsequent Auditor

  1. The auditor must be chosen by the company's members at the first AGM.
  2. If ratified by the firm, the auditor will serve for five years (the Companies (Amendment) Act, 2017 omitted the ratification requirement).
  3. Within 15 days, Form ADT-1 must be filed to notify the Registrar of Companies of the appointment.

4. Auditor Rotation [Section 139(2)]

Required for:

  1. Companies that are listed
  2. Public corporations that are not listed but have paid-up share capital of at least ₹10 crores.
  3. Private businesses with loans of at least ₹50 crore or paid-up share capital of at least ₹50 crores.

Rotation standards:

  1. An auditor may be appointed for a single, five-year term.
  2. An audit firm may operate for two five-year terms.
  3. Five years before reappearance is the cooling-off phase.
  4. Additionally, following rotation, the same network of audit firms cannot be appointed.

5. Section 141: Eligibility and Disqualifications

An auditor can only be a chartered accountant (CA) or a company of CAs.

Those who are not eligible include:

  1. A corporation (as opposed to an LLP)
  2. The company's officer or employee
  3. Someone who works for the company as an employee or partner of an officer
  4. Any individual with a stake or interest in the business or its affiliates
  5. An individual who owes the business over ₹5 lakh
  6. An individual with commercial ties to the organization
  7. A person with a fraud conviction (for 10 years after conviction)

6. Company (Audit and Auditors) Rules, 2014, Rule 4: Auditor's Consent and Certificate

Before the appointment:

  1. To operate as an auditor, the potential auditor must provide written consent.
  2. It is necessary to get a certificate certifying eligibility and non-disqualification under Section 141.

7. Auditor Compensation [Section 142]

The Board (for the first auditor) or the shareholders at the AGM decide on compensation.

It excludes payment for non-audit services and includes audit fees, charges, and other associated expenses.

8. Removal and Resignation of Auditor – [Section 140]

Resignation:

  1. After resigning, the auditor has 30 days to submit Form ADT-3.
  2. The RoC must be notified by the company in the same time frame.
  3. Removal before the term's expiration:
  4. It needs the Central Government's permission and a specific resolution.
  5. After board approval, the application must be submitted in Form ADT-2 within 30 days.

9. Services Prohibited [Section 144]

The following services cannot be provided by the auditor:

  1. Bookkeeping and accounting
  2. Internal examination
  3. Financial system design
  4. Services for Actuaries
  5. Advisory for investments
  6. Services for management
  7. Any further services that are recommended
  8. This guarantees the auditor's impartiality and independence.

10. [Section 147] Penalties

Company: ₹5 lakh in fines

  • Officers in default face fines and jail time.
  • For professional misconduct, an auditor may be subject to fines, penalties, and debarment.

Conclusion:

According to the Companies Act of 2013, hiring an auditor is a strategic and obligatory compliance necessity.  It not only satisfies a legal need but also increases stakeholder trust in the company's financial stability.  Businesses must make sure that the auditor is hired in accordance with Sections 139 to 147 and that the appropriate paperwork, such as ADT-1, ADT-2, and ADT-3, is submitted on time.  For corporate governance to be sustainable and compliant, it is essential to maintain auditor independence, follow rotation procedures, and prevent disqualifications. Appointment of auditor India, Companies Act 2013 compliance, Auditor eligibility & process, Corporate compliance services