Company auditor: appointment, rotation, qualifications, disqualifications, removal and remuneration

1. Appointment (section 139)

First auditor.

• Non-government company: appointed by the Board within 30 days of registration; if the Board fails, the members appoint at an extraordinary general meeting within 90 days. The first auditor holds office till the conclusion of the first annual general meeting (s.139(6)).
• Government company: appointed by the Comptroller and Auditor-General within 60 days of registration; failing which the Board within the next 30 days; failing which the members at an EGM within 60 days (s.139(7)).

Subsequent auditors. Every company at its first annual general meeting appoints an individual or a firm as auditor, who holds office from the conclusion of that meeting till the conclusion of the sixth annual general meeting, that is, a term of five years (s.139(1)). Before the appointment the auditor’s written consent and a certificate that he is eligible and satisfies the criteria of section 141 must be obtained. The company informs the auditor and files a notice of the appointment with the Registrar (Form ADT-1) within 15 days of the meeting. The original requirement that members ratify the appointment at every AGM was omitted by the Companies (Amendment) Act 2017. Where there is an audit committee, its recommendation is considered by the Board before the appointment (s.139(11), s.177).

Government companies. For a government company and companies controlled by the government, the CAG appoints the auditor within 180 days from the commencement of the financial year, and the auditor holds office till the conclusion of the AGM (s.139(5)). The CAG may give directions and conduct a supplementary audit (s.143(5) and (6)).

Casual vacancy (s.139(8)): filled by the Board within 30 days; but if the vacancy is caused by the resignation of the auditor, the appointment must also be approved by the company at a general meeting convened within three months of the Board’s recommendation. The appointee holds office till the conclusion of the next AGM. In a government company the CAG fills it within 30 days.

No appointment at AGM: the existing auditor continues (s.139(10)). A retiring auditor may be reappointed, subject to rotation, if he is not disqualified, has not given notice of unwillingness, and no special resolution has been passed appointing someone else or providing that he shall not be reappointed (s.139(9)).

2. Rotation of auditors (section 139(2))

Listed companies and prescribed classes of companies cannot appoint or reappoint:

• an individual as auditor for more than one term of five consecutive years;
• an audit firm for more than two terms of five consecutive years (ten years).

After completing the term, the individual or firm is not eligible for reappointment in the same company for five years (the cooling-off period). A firm with a common partner with the outgoing firm cannot be appointed during that period either. Rule 5 of the Companies (Audit and Auditors) Rules 2014 extends rotation to unlisted public companies with paid-up share capital of Rs. 10 crore or more, private companies with paid-up share capital of Rs. 50 crore or more, and companies with public borrowings from financial institutions or banks or public deposits of Rs. 50 crore or more (one-person companies and small companies are excluded). Members may also provide for rotation of the audit partner within the firm, and for joint audit (s.139(3)).

3. Qualifications (section 141(1) and (2))

• Only a chartered accountant (a member of ICAI holding a certificate of practice) can be appointed auditor of a company.
• A firm (including a limited liability partnership) can be appointed if the majority of its partners practising in India are chartered accountants; only partners who are chartered accountants may act and sign on behalf of the firm.

4. Disqualifications (section 141(3))

The following are not eligible:

1. a body corporate other than an LLP;
2. an officer or employee of the company;
3. a person who is a partner, or in the employment, of an officer or employee of the company;
4. a person who, or whose relative or partner, holds any security or interest in the company or its subsidiary, holding or associate company (a relative may hold securities of face value up to Rs. 1 lakh under Rule 10);
5. a person who, or whose relative or partner, is indebted to the company or its group companies in excess of Rs. 5 lakh, or has given a guarantee or security for a third person’s debt to the company in excess of Rs. 1 lakh;
6. a person who, or whose relative or firm, has a business relationship with the company or its group companies (other than in the ordinary course of professional practice);
7. a person whose relative is a director or is in the employment of the company as a director or key managerial personnel;
8. a person in full-time employment elsewhere, or a person or partner who is already auditor of more than twenty companies (one-person companies, dormant companies, small companies and private companies with paid-up share capital below Rs. 100 crore are left out of the count by an exemption notification);
9. a person convicted of fraud, for ten years from the conviction;
10. a person who, or whose subsidiary or associate entity, is providing to the company any of the services prohibited by section 144 (consulting and specialised services).

An auditor who becomes disqualified after appointment vacates office, and the vacancy is a casual vacancy (s.141(4)).

5. Removal and resignation (section 140)

• Removal before the end of the term: by special resolution of the company, after obtaining the previous approval of the Central Government (application in Form ADT-2 within 30 days of the Board resolution; the special resolution within 60 days of approval). The auditor must be given a reasonable opportunity of being heard (s.140(1)).
• Resignation: the auditor files a statement in Form ADT-3 with the company and the Registrar within 30 days, giving the reasons and other facts relevant to the resignation (s.140(2)); failure attracts a penalty (s.140(3)).
• Appointing someone other than the retiring auditor at an AGM needs a special notice; the company sends a copy to the retiring auditor, who may make written representations and ask that they be circulated to members or read out at the meeting (s.140(4)).
• Tribunal’s power (s.140(5)): if the Tribunal finds that the auditor has acted fraudulently or abetted or colluded in fraud by the company or its directors or officers, it may order the company to change its auditor; the auditor is then ineligible for appointment in any company for five years and liable under section 447. In Union of India v. Deloitte Haskins and Sells LLP, 2023 INSC 484, arising out of the IL&FS default, the Supreme Court upheld the validity of section 140(5) and held that proceedings under it do not end merely because the auditor resigns.

6. Remuneration (section 142)

The remuneration of the auditor is fixed by the company in general meeting or in such manner as it determines; the remuneration of the first auditor may be fixed by the Board. It includes expenses incurred in connection with the audit and facilities extended to him, but not fees for other services rendered at the company’s request.

How this is examined

“Explain the qualification and disqualification of an auditor” (November 2021, August 2024, January 2026 Q.7 for 16 marks; “qualification of company auditor” as a short note, October 2023): sections 3 and 4 in full. “Appointment and qualification of company auditor” (April 2023) and “appointment and tenure” (2022): section 1, rotation and a line on removal. Short note on appointment (November 2021): section 1 in points.