Appointment of Auditors at AGM - Requirements

The first auditors of a company shall be appointed soon after the incorporation of a company and their term shall be valid only till the first Annual General Meeting (AGM) of the Company. Every company is required to appoint their Statutory Auditor in the first Annual General Meeting for a period of 5 years till the end of 6^th AGM of the company. There after the appointment of auditors has to happen for every five years.

Section 139 of Companies Act, 2013 read with Companies (Audit and Auditors) Rules, 2014 prescribes the conditions relating to appointment of auditors at an AGM of the company. Every company shall be required to appoint an auditor at First/Subsequent AGM for a term not less than 5 years.

Before making the appointment, the Board has to obtain a written consent from the auditor and a certificate that all requirements are in accordance with the Act.

Statutory Auditor of the Company

The audit of a company shall be carried out by the Statutory Auditor appointed by the company in its Annual General Meeting. Only a chartered accountant who holds a valid certificate of practice under Chartered Accountants Act, 1949 can become an auditor of the company. Also, the company can appoint a firm as its auditor if majority of partners are practicing in India and are eligible for appointment. Further, only those partners who are chartered accountant shall be allowed to sign on behalf of such a firm.

Appointment of Auditors at an AGM

The statutory auditors are generally appointed with the approval of members at an AGM unless a casual vacancy of the auditors occurs. The term of appointment shall be for a period of 5 years at all times meaning which a period less than 5 years cannot be chosen.

However, after appointment, the auditors can be removed at any time by the members subject to the approval of central government. Earlier, there was a requirement for ratification of the appointed auditors in every AGM. However, such ratification is not required as per latest amendment in the Act.

Remuneration of Auditors 

The remuneration payable to the auditor shall be decided at the AGM including also the expenses incurred in connection with the audit and any facility extended to him excluding remuneration paid for any other service at the request of the company. 

Procedure of Appointment of Auditors at an AGM

• Propose an auditor for appointment and check for eligibility of appointment from him.
• Obtain a consent letter and a certificate from the auditor under Companies Act
• Convene Board Meeting and pass the resolution appointing the Statutory Auditor of the company.
• Convene Annual General Meeting and get the approval of members at the AGM by passing an ordinary resolution.
• Issue an intimation to the auditor about the appointment as auditor of the company.
• File the notice of appointment in ADT-1 with the registrar of companies within 15 days from the meeting in which such auditor is appointed with a Copy of resolution appointing the auditor and Consent letter given by the auditor and Intimation sent by the company

The auditor so appointed shall hold office till the conclusion of the sixth annual general meeting.

Re-appointment of Auditor 

If the auditor completes his term of 5 years, the auditor’s term shall expire.  The company has to re-appoint the auditors in such case. A company can re-appoint a retiring auditor if:

• he is qualified for re-appointment
• a notice of his unwillingness to be re-appointed is not given to the company
• a special resolution appointing some other auditor or providing expressly that he shall not be re-appointed has not been passed.

The following companies except OPC and Small company shall not appoint or reappoint an individual for more than one term of five consecutive years or an auditor firm for more than for more than two terms of five consecutive years: 

• Listed Companies
• Unlisted public company having paid up share capital of rupees 10 crores or more;
• Private limited companies having paid up share capital of rupees 50 crore or more;
• Unlisted public company and Private company having public borrowings from financial institutions, banks or public deposits of rupees 50 crore or more.

The individual auditor or firm can be re-appointed in the same company after their completion of term as prescribed above, only after 5 years from completion of his term. Also, an audit firm having a common partner to other audit firm, whose term has expired in a company immediately preceding the financial year cannot be appointed as an auditor of the same company for 5 years.

Special Notice

If the members don’t want to re-appoint the retiring auditor, a special notice shall be send to the company stating appointment of some other auditor or that the retiring auditor shall not be re-appointed. Upon receiving such a notice, the company shall forward the same to the retiring auditor and take necessary steps as prescribed under the Act.

Penalty for contravention 

• The company acting in contravention of any of the provisions shall be punishable with fine from ₹25,000.00 to ₹5,00,000 and every officer of the company in default shall be punishable with imprisonment for a term 1 year or with fine fom ₹10,000.00 to ₹1,00,000.00 or with both.
• The auditor who contravenes any of the provisions shall be punishable with fine not less than ₹25,000.00 but which may extend to ₹5,00,000.00 or 4 times the remuneration of the auditor, whichever is less. Further, if it is done knowingly or wilfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term of 1 year and with fine from ₹50,000.00 to ₹25,00,000.00 or 8 times the remuneration of the auditor, whichever is less.
• Further the auditor convicted as mentioned above shall be also liable to refund the remuneration received by him to the company and pay for damages to the company/statutory bodies/authorities/ to members/creditors of the company for loss which has arisen out of misleading statements of particulars made in his audit report. Central government may ask to file a report in respect of prompt payment for making such damages in such manner as may be specified in the said notification. If the partner or partners of the audit firm have acted in a fraudulent manner/colluded/abetted for action of company or directors, the concerned partner shall be liable whether civil or criminal as provided in this Act jointly and severally.