To understand it clearly, an auditor is an independent professional qualified to perform audit of the organisation as per the provisions of Companies Act. Sections 138 till 148 of Companies Act deal with provisions regarding audit, auditors and accounts.
Companies Act 2013 have detailed provisions for appointment, regulation. Removal and reappointment of auditors. Auditors constitute a very important part in the management especially compliance management of a body corporate. They are the people who ensures that the wealth and future of the stake holders are secure.
First auditor is the auditor appointed by the board of director of a newly incorporated company. They will hold office till the first Annual General meeting. This is regulated by the provisions of Sec 139. Appointment of auditor is a prime requirement and the auditor can be either individual or firm.
Term of auditor
If the auditor is an individual then the auditor can be appointed for five years and the same person cannot be considered for reappointment for a next five years. He can be considered after five years elapsed from the first term. But in the case of firm to be appointed as auditor, it can be appointed for a term five years first and can be extended for another term of five year, maximum one extension. The firm also cannot be appointed for another term of five years after the second term ends.
If the auditor is a firm, the re appointment is not possible even if one single partner is common in two firms.
Auditor for Government Company
First auditor for a government company will be appointed by the Comptroller and Auditor General within 60 days from the date of incorporation. But if the Comptroller and Auditor General fails to appoint then the board of directors shall appoint the auditor within next thirty days.
In respect of a financial year, the Comptroller and Auditor-General of India shall appoint an auditor within a period of one hundred and eighty days from the commencement of the financial year. Such auditor shall hold office until the conclusion of the annual general meeting.
Who can be appointed as auditor?
A person who is a member of Institute of Chartered Accountants of India or a firm where majority of the partners who are practicing in India are members of the institute can be appointed as auditor of a company. Only members of the institute can act and sign on behalf of the firm.
Following persons are not authorised to act as auditor – Sec 141.
- An officer or employee of the company
- A person whose relative is director or is in the employment of the company’s director or key managerial personnel.
- A person who is convicted by a competent court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.
- A person or a firm who has business relationship with the company not in the ordinary course of business, or with subsidiary or associate company.
- A person who is in full time employment else where
- A person or a partner holding as its auditor is at the date of such appointment or reappointment holding appointment as auditor for more than 20 companies.
How to remove an auditor?
A duly appointed auditor may be removed before the expiry of his term only by a special resolution of the company in general meeting, but a previous approval of the Central Government should be procured in the manner prescribed.
Resignation of director
An auditor can resign from the company at his will. Such auditor who resigned from the company shall file within a period of thirty days from the date of his resignation , a statement in the prescribed format with the Registrar of Companies and the company indicating the reasons and other facts as may be relevant with regard to his resignation. In the case of government company the statement should also be filed with CAG. If the auditor fails to do so, he shall be punishable with fine ranging between 50000 Rupees to 5 Lakh.
Removal by National Company Law Tribunal
In the following situations the tribunal can take initiation
- At its own motion – suo motu
- Application made by central government
- Application by any person concerned.
On investigation if the tribunal satisfied that the auditor of a company has whether directly or indirectly, acted fraudulently with regard to company or its directors or officers, it may, by order, direct the company to change auditors.
In the case of such an application by the Central Government for change of Auditors, the Tribunal can, within 15 days, pass an order that the auditor shall not function as such and the Central Government will be able to appoint another auditor. This is an action with high impact. Once such a decision is taken following consequences will follow
- Such removed auditor cannot be appointed as an auditor of the company for five years.
- Imprisonment for a minimum of 6months which can be extended to 10 years and also a fine of amount involved which can be increased to 3 times of the amount.
- If the fraud involves public interest the minimum period of imprisonment will be three years.