Appointment of Auditors is a crucial step in the corporate governance process for a company. It involves selecting a qualified auditor to examine the financial records of the company and ensure compliance with accounting standards and tax laws. Below is a comprehensive guide on the appointment of auditors in India under the Companies Act, 2013:
1. Legal Requirement for Appointment of Auditors
According to the Companies Act, 2013, all companies (except certain exempted categories like small companies, OPCs, etc.) are required to appoint an auditor for the company at their first Annual General Meeting (AGM) and thereafter at every AGM.
The appointed auditor must be a chartered accountant or a firm of chartered accountants that holds a valid registration with the Institute of Chartered Accountants of India (ICAI).
2. Types of Auditors
- Statutory Auditor: The primary auditor appointed to audit the financial statements of the company.
- Internal Auditor: Sometimes appointed for internal audits to review the internal control systems of the company (this is mandatory for some types of companies, such as listed companies).
3. Appointment of Auditor in the First AGM
- Initial Appointment: The company’s first AGM must appoint an auditor for the company. The shareholders of the company pass a resolution to approve the appointment.
- Tenure of Appointment: According to the Companies Act, an auditor is appointed for a term of one year in the first AGM, after which they are reappointed at every subsequent AGM until the company decides to change the auditor.
4. Appointment of Auditor in Subsequent AGMs
- Reappointment: At every AGM, shareholders are required to either reappoint the existing auditor or appoint a new one.
- If no resolution is passed to appoint a new auditor, the existing auditor will be automatically reappointed.
- Tenure of Reappointment: An individual auditor can be reappointed for a maximum of one term (5 years), after which they must rotate out.
- Audit Firm: A firm of auditors can be reappointed for a maximum of two terms (10 years), after which a different firm must be appointed, unless a special resolution is passed for reappointment.
5. Procedure for Appointment of Auditor
Here are the steps involved in the appointment process:
Step 1: Board Meeting
- The Board of Directors of the company should hold a Board Meeting to decide and recommend the appointment of an auditor.
- A resolution should be passed in the meeting, proposing the name of the auditor to be appointed.
Step 2: Approval at AGM
- The appointment of the auditor must be approved by the shareholders at the Annual General Meeting (AGM).
- A resolution should be passed by a majority vote of the shareholders present at the AGM. This is typically done through an ordinary resolution.
- If the company is a private company or a small company, special procedures for appointment might apply.
Step 3: Consent from the Auditor
- The company should obtain written consent from the proposed auditor before their appointment.
- A certificate from the auditor stating that they meet the requirements for being appointed and are eligible for appointment under the Companies Act must also be obtained.
Step 4: Filing with ROC
- After the appointment is approved by the shareholders at the AGM, the company must inform the Registrar of Companies (RoC).
- The Form ADT-1 needs to be filed with the RoC within 15 days of the appointment of the auditor.
Step 5: Issuing the Appointment Letter
- Once the appointment is confirmed, the company must issue an appointment letter to the auditor, stating the terms of the appointment and the fee structure.
6. Duties of the Auditor
- Financial Statements Audit: The primary duty of the appointed auditor is to examine the company’s financial statements and ensure that they are prepared in accordance with the accounting standards.
- Report on the Financial Health: After completing the audit, the auditor must submit an audit report to the shareholders, which includes their opinion on the accuracy and fairness of the financial statements.
- Compliance: The auditor must also ensure that the company complies with relevant laws and regulations, including tax laws.
7. Rotation of Auditors
The Companies Act, 2013, mandates rotation of auditors for better transparency and to prevent the potential build-up of conflicts of interest:
- Individual Auditor: An individual auditor can serve for a maximum of one term (5 years).
- Audit Firms: Audit firms can serve for a maximum of two terms (10 years), and then they must rotate out.
- This ensures that fresh perspectives are brought to the auditing process and reduces the possibility of collusion.
8. Removal of an Auditor
An auditor may be removed before the expiration of their term under the following circumstances:
- By the Shareholders: The shareholders may remove an auditor by passing a special resolution at an AGM or an EGM, with the consent of the Central Government.
- In the Event of Misconduct: If the auditor is found guilty of misconduct or negligence, the company may remove them with the prior approval of the Central Government.
9. Filing Fees and Penalties
- Form ADT-1 Filing Fees: There is a nominal filing fee for submitting Form ADT-1 with the RoC.
- Non-Compliance: Failure to appoint an auditor or file Form ADT-1 can result in penalties for the company and its officers, including fines and legal action.