The appointment of auditors in India is governed by the Companies Act, 2013, which outlines a systematic procedure to ensure transparency and accountability in the audit process. The process differs slightly between various types of companies, such as private companies, public companies, and government companies.
Eligibility Criteria
Before the appointment process begins, it is crucial to ensure that the proposed auditors meet the eligibility criteria set out in the Companies Act. According to Section 141 of the Act, an individual or a firm can be appointed as an auditor if they:
- Are a Chartered Accountant (CA) within the meaning of the Chartered Accountants Act, 1949.
- Meet the prescribed qualifications and are not disqualified under any of the provisions of the Companies Act.
- Have not been disqualified to be appointed as auditors of a company, such as holding any security or interest in the company or being an employee or a partner of an employee of the company.
Appointment of Auditors in Annual General Meeting (AGM)
Appointment of auditors is typically made at the Annual General Meeting (AGM) of the company. The procedure includes the following steps:
- Recommendation by the Board:
Board of Directors evaluates and recommends the name of the auditor to be appointed at the AGM. This recommendation is based on the auditor’s qualifications, experience, and past performance.
- Notice of AGM:
The company must include the proposed auditor’s name in the notice sent to the shareholders for the AGM. Along with the notice, a statement disclosing the auditor’s eligibility and qualifications is usually included.
- Voting by Shareholders:
During the AGM, shareholders discuss and vote on the appointment of the auditor. A resolution is passed for the appointment of the auditor, which requires a simple majority of votes.
Filing of Form ADT-1
Once the auditor is appointed, the company is required to inform the Registrar of Companies (RoC) about the appointment. This is done by filing Form ADT-1 within 30 days of the AGM. The form includes details such as:
- Name and address of the auditor or audit firm.
- Membership number (for individuals) or registration number (for firms).
- The date of appointment and the term for which the auditor is appointed.
Tenure of Appointment
Appointed auditor holds office from the conclusion of the AGM in which they are appointed until the conclusion of the sixth AGM, subject to ratification by shareholders at every AGM. However, the Companies (Amendment) Act, 2017, has removed the requirement for annual ratification of auditor appointments for companies, meaning the auditor will continue in office until the end of the specified term.
Reappointment and Rotation of Auditors:
- Reappointment:
An auditor can be reappointed after the completion of their term, provided they meet the eligibility criteria and are not disqualified. The company must also ensure that the auditor’s performance has been satisfactory.
- Rotation of Auditors:
Companies Act mandates the rotation of auditors for certain classes of companies to enhance independence. Listed companies and public companies with paid-up share capital of ₹10 crore or more must rotate their auditors every five years. An individual auditor cannot be reappointed in the same company for more than one term of five consecutive years, and an audit firm cannot be reappointed for more than two consecutive terms of five years.