An auditor is a member of a Chartered Accountancy network who has been registered under the Chartered Accountant Act of 1949 and trained in the verification and analysis of accounting reports.
Selecting auditors is considered a governance problem, and the roles of auditors influence the reliability of corporations' financial statements to a large extent.
To this end, the ensuing specific blog post casts its lens on the provisions regarding the appointment of auditors as stipulated in the Companies Act 2013.
Objective of An Auditor in a Company
Thus, the role of company auditors is regarded as protecting the principal shareholders' value.
In a broad sense, auditors are the persons appointed by the laws to scrutinise and vouch for a company's accounting records prepared by its management and give the actual position of the company's affairs.
These needs include fulfilling the external auditor's presence to ensure responsibility and openness, which is crucial for the health of the organization and the investments of owners.
Application for First Auditor Post Incorporation
1) Non-Government Company
In any other non-governmental company, the Board of Directors shall appoint the first auditor within thirty days of registration, and this process shall be followed.
Perhaps if the Board doesn’t provide an auditor, in that case, the members can provide one at the EGM within 90 days after the company's formation.
2) Listed/Specified Company
Appointing an auditor for a listed or specified company is similar to that of non-government companies.
The Board of Directors must appoint the first auditor within 30 days of registration. If this still needs to be done, the members can appoint an auditor at an EGM within 90 days.
3) Government Company
In the case of a government company, the first auditor is appointed by the Comptroller and Auditor General of India within 60 days of incorporation.
In any case, the Board of Directors shall have to decide its preference of methods of the appointment of the auditor within 30 days of incorporation; the members can also suggest one through an extraordinary general meeting within 60 days of incorporation.
Auditor Appointment at First Annual General Meeting (AGM)
1) Non-Government Company
At the inaugural AGM, electors shall also appoint the auditor who serves until the close of the sixth annual general meeting. All appointments must be subject to the requirements of the auditor.
2) Listed/Specified Company
The members are similarly appointed at the first AGM in listed or specified companies. The auditor can serve a maximum term of 5 or 10 consecutive years, after which a mandatory cooling-off period is five years before reappointment.
3) Government Company
For government companies, the appointment is made by the Comptroller and Auditor General of India, who must be appointed within 180 days from April 1st.
Appointment of Subsequent Auditors
1) Non-Government Company
The members appoint subsequent auditors and will hold office until the conclusion of the sixth AGM.
2) Listed/Specified Company
The members appoint subsequent auditors in listed or specified companies for 5 or 10 consecutive years.
3) Government Company
There is the appointment of the next auditor, for government companies to be done within 180 days from April 1st by the Comptroller and Auditor General of India.
Casual Vacancy in the Case of Resignation and Other Reasons
1) Non-Government Company
He members will make an appointment based on the board's recommendations in case of casual vacancy arising due to resignation; this will be done within three months, and the appointed auditor will hold office until the following AGM.
2) Listed/Specified Company
The process for listed or specified companies mirrors that of non-government companies. Following the Board's recommendations, the members appoint an auditor within three months to serve until the next AGM.
3) Government Company
For government companies, the Comptroller and Auditor General of India fills casual vacancies within 30 days of the vacancy happening.
Section 139: Appointment of Auditors
Section 139, Companies Act, 2013 states that with the exception of an One- Person Company or OPC, every company shall at its first annual general meeting, appoint a person, a firm, or a corporate body as its auditor.
Such appointed auditor continues till the end of its sixth annual general meeting but remains liable to ratification by the shareholders respectively at each annual general meeting.
This provision allows shareholders to be represented in the appointment of auditors to enhance accountability.
Qualifications and Disqualifications of Auditor
An auditor will be qualified for appointment under the provisions of these regulations if he is a qualified Chartered Accountant under the Chartered Accountants Act, 1949, and the qualifications are as follows:
- An officer or employee of the company.
- A related party of an officer or employee of the corporation.
- Having securities in the corporation, either directly or indirectly.
- Having borrowed money from or lent to the corporation, with a balance exceeding a stated amount.
- Having a financial relationship with the corporation.
The Act further provides certain disqualifications made under Section 141, which stipulates that no firm or individual shall be qualified to act as an auditor if they so happen to be.
These provisions focus on maintaining auditors' independence and objectivity so that the public can be confident in their financial reporting.
Appointment Procedure
The steps involved in the appointment process are as follows:
1) Board Recommendation
The Board of Directors shall recommend an auditor to the shareholders in a general meeting for their appointment.
2) Shareholders Approval
The shareholders must approve it in an ordinary resolution at the general meeting. The company should also inform the auditor appointed of their appointment.
3) Filing with the Registrar
The prescribed forms, including the particulars of the auditor and his acquiescence to the appointment, shall be filed with the ROC within 30 days from the date of appointment.
4) Communication
The company shall communicate the appointment of the auditor to the auditor within 30 days from the date of such appointment.
Removal of Auditors
Moreover, the Act stipulates that an auditor can be removed before the term expires. Section 140 specifies that the auditor can be removed from office only with the prior approval of the Central Government and with a special resolution passed in a general meeting.
This is done to prevent management from arbitrarily removing auditors and, therefore, protect their independence. As of the Companies Act 2013, the appointment of auditors was pursued to enhance the integrity and transparency of financial reporting in India.
It employs a formal procedure with rotating qualifications and disqualifications for auditors to help reinforce the power of public trust over corporate governance.
Thus, this understanding has become critical to appropriate management and holding people accountable as companies navigate this labyrinthine compliance process.
In any case, the strong emphasis on independence and integrity in the audit process underscores these for companies, investors, and other stakeholders who rely heavily on accurate financial information when making decisions.
Conclusion
Major requirements by the Companies Act 2013 include the appointment of auditors. The auditors may help the company ensure the proper accuracy of the financial statements.
All provisions, including appointment, qualification, disqualification, rights, duties, and removals of auditors, are made under this Act to ensure their independence, objectivity, and accountability.
Therefore, the auditor plays a fundamental role in achieving this purpose so that a firm's statements regarding its position are somewhat reflected and in line with the relevant laws and regulations. The auditor shall issue an opinion on the financial statements and report any material misstatements or weaknesses in internal control.
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