(UPDATE: on 30th August 2013: Companies Bill 2012 became the Companies Act, 2013 (Act 18 of 2013).
Corporate Governance is a fundamental structure of all recent companies’ laws globally. True and fair Audits are core concern for corporate world and its regulators. While I was writing my earlier blog post “Footsteps of Corporate Governance in Companies Bill 2012 Companies Act, 2013”, I noticed that the Companies Bill, 2012 Act, 2013 has special concern for quality of audits. In my post “National Financial Reporting Authority” you may feel the depth of concern of our law makers about audits, which have already been forced accounting and auditing regulator, the Institute of Chartered Accountants of India, for introspection.
In this series of my blog post related to Companies Bill, 2012 Act, 2013; I am writing about provision relating to auditors. The manner of appointment of auditors may affect independence of audit. The bill Act addresses this issue very well.
APPOINTMENT OF AUDITOR (Section 139)
The explanation to sub – section (1) of section 139 clarifies that for this chapter dealing with Audit and Auditors, term ‘appointment’ include re – appointment.
First Auditor (Sub – Section 6):
The first auditor of a company (other than Government companies) shell be appointed by the Board of Directors within thirty days from the registration of the company. In case of failure of the Board of Directors to appoint an auditor, members shall appoint an auditor in an extra ordinary general meeting.
It is not clear from which date, these ninety days shall be counted but I presume it from the expiry of first thirty days.
Companies in general: (Sub – section 1)
At first Annual general meeting every company shall appoint an individual or firm as an auditor. Auditor appointed in first annual general meeting shall hold from conclusion of that annual general meeting till conclusion of sixth annual general meeting. It means appointment shall be for 5 years. However, a ratification of such appointment shall be made every year in annual general meeting.
Before such appointment the company shall obtain a written consent and a certificate of eligibility from the auditor proposed to be appointed. The certificate shall confirm that the auditor satisfy the criteria given in Section 141.
The company shall confirm that such appointment to auditor and file a notice of appointment with the Registrar within fifteen day of such appointment.
Additional Conditions for Specified Companies: (Sub – section 2)
No listed company or some other companies as notified shall appoint or re – appoint (i) an individual for more than one term of five consecutive years, or (ii) an audit firm for more than two terms of five consecutive years.
Any audit firm shall not be appointed as auditor which has any common partner or partners with the firm whose tenure has expired in the company immediately preceding financial year.
These companies shall required to comply these requirements within three years of enforcement of this Act.
Central Government may by rule prescribe the manner of rotation under this subsection.
Additional Optional conditions for Companies: (Sub – section 3)
Members of a company may adopt any of two additional conditions by way of resolution that; (a) the audit partner and his team shall be rotated at an interval decided in the resolution or (b) the audit shall be conducted by more than one auditor.
Government Company (Sub – section 5):
In case of Government companies and companies directly or indirectly owned or controlled by any Government, the Comptroller and Auditor General of India shall appoint an auditor within a period of one hundred and eighty days from commencement of financial year to hold office till conclusion of the annual general meeting.
First auditor in Government Companies (Sub – section 7):
In case of Government Company, first auditor shall be appointed by comptroller and Auditor General of India within sixty days of registration of the company. In case of Comptroller and Auditor General of India does not appoint first auditor within said sixty days, the Board of directors shall appoint such auditor within next thirty days. In case of failure of Board to appoint first auditor within this period, the members shall appoint such auditor within next sixty days. The first auditor shall hold office until the conclusion of first annual general meeting.
Causal Vacancy (Sub – Section 8):
Any causal vacancy in office of auditor shall be filled by the Board of Directors within thirty days. In case if such causal vacancy is a result of resignation of an auditor, this shall also be approved by company at general meeting convened within three months of the recommendation (read appointment as relevant term is approval) of the board. Any such auditor appointed in causal vacancy shall hold office until the conclusion of next annual general meeting.
In case of Government Company, causal vacancy shall be filled by comptroller and auditor general of India within thirty days. In case Comptroller and Auditor General of India does not fill within thirty days, then by Board of Directors shall fill vacancy within next thirty days.
Re – appointment (Sub – section 9):
A retiring auditor may be re – appointed in an annual general meeting. The conditions for such re – appointment are:
(a) He is not disqualified for re – appointment.
Here we can revisit provision of sub – section (1) of this section 139, which say that re –appointment shall also be for a term of five years by using words “till the conclusion of every sixth meeting”.
(b) He has not given a notice in writing of his unwillingness to be reappointed.
(c) A special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re – appointed.
Sub – section (2) of this section 139 expressly say that provide that no listed company or some other companies as notified shall appoint or re – appoint (i) an individual for more than one term of five consecutive years, or (ii) an audit firm for more than two terms of five consecutive years. Any audit firm shall not be appointed as auditor which has any common partner or partners with the firm whose tenure has expired in the company immediately preceding financial year.
Sub – section (10) say where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company. I presume that this provision shall be subject to provision of sub – section (2).
Please continue to next page of this post.
Recommendation of Audit Committee (sub – section 11):
Where a company is required to constitute an Audit Committee under section 177, all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee.
REMOVAL AND RESIGNATION etc. (SECTION 140):
To maintain independence and fearless audit, there should not be any treat for unfair removal and right to resign to protest.
Removal (Sub – section 1):
The auditor may be removed from his office before expiry of his term only by special resolution after approval from central government. The auditor concern shall be given opportunity of being heard.
Resignation (Sub – section 2):
The auditor who resigns from the company shall file, within a period of thirty days from his resignation a statement with the company and the Registrar indicating the reason and other facts as may be relevant with regard to his resignation. In case of Government Company, this statement shall also be filed with the Comptroller and Auditor General of India.
If auditor does not file such statement, he or it shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.
Denial of Re –appointment (Sub – section 4):
If, it is proposed to appoint another auditor in place of retiring auditor or not to re – appoint retiring auditor except where retiring auditor has completed his tenure of five or ten years as the case may be; a special notice shall be required to be circulated for the resolution.
On receipt of special notice of such resolution, the company shall immediately send a copy of such notice to retiring auditor.
On receipt of copy of such notice, the retiring auditor may make a representation of reasonable length and request its notification to the members of the company. Unless such representation received too late for circulation, the company shall (a) state the fact of such representation in the notice of the resolution to members of the company and (b) send a copy of the representation to every member of the company to whom the notice of meeting is sent. If the copy of the representation is not sent to members, a copy of the representation shall be filed with the Registrar. If the Tribunal is satisfied on an application either of the company or any other aggrieved person that the right of making representation are being abused by the auditor, then, the copy of the representation may not be sent and the representation need not be read out at the meeting.
Change of Auditor by order of Tribunal (Sub – section 5):
The tribunal either its own or on an application made by the central government or by any concerned person may by order direct the company to change its auditor. The tribunal shall make such order, when it is satisfied that the auditor has, directly or indirectly acted in a fraudulent manner or abetted or colluded in any fraud by or in relation to the company or its directors or officers.
If such application was made by the Central government and the tribunal is satisfied that any change is required, it shall within fifteen days of receipt of application make an order that he shall not function as an auditor and the central government may appointment another auditor in his place.
The auditor, against whom final order has been passed by the Tribunal under this section, shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable for action under section 447, which deals with punishment for fraud. Please note, the explanation to sub – section (1) of section 139 clarifies that for this chapter dealing with Audit and Auditors, term ‘appointment’ include re – appointment.
ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS:
An auditor must be an independent and properly qualified person.
Eligibility (Sub – section 1):
An individual shall be eligible for appointment as an auditor of a company only if he is a chartered accountant. A firm with majority of partners practicing in India qualified for appointment may be appointed as auditor by its firm name.
In case of appointment by firm name only the partners who are chartered accountants shall be authorized to act and sign on behalf of the firm.
Disqualifications (Sub – section 3):
Following persons shall not be eligible for appointment as an auditor of a company:
(a) A body corporate other than a limited liability partnership;;
(b) An officer or employee of the company;
(c) A person who is a partner or who is in the employment of an officer of employee of the company;
(d) A person who or his relative or partner (i) is holding any security of or interest in, or (ii) is indebted to, or (iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its subsidiary, or its holding or its associate company or a subsidiary of such holding company;
(e) a person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed;
(f) a person whose relative is a director or is in the employment of the company as a director or key managerial personnel;
(g) a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies;
(h) a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction;
(i) any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialised services as provided in section 144.
The service under this section 144 are:
(a) accounting and book keeping services;
(b) Internal audit;
(c) Design ad implementation of any financial information system;
(d) Actuarial services;
(e) Investment advisory services;
(f) Investment banking services;
(g) Rendering of outsources financial services;
(h) Management services; and
(i) Any other kind of services as may be prescribed.
Vacation of Office of Auditor (sub section 4):
Where an auditor of a company incurs any of the disqualifications mentioned in sub-section (3) after his appointment, he shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor.
REMUNERATION OF AUDITOR (SECTION 142):
Independence from any bias of management in fixation of remuneration is a key of good governance and audit.
Fixing Remuneration (Sub – section 1):
The remuneration of an auditor shall be fixed in general meeting in such manner or in such manner as may be determined therein. The remuneration of first auditor shall be fixed by board of directors.
Independence of Audit Remuneration (Sub – section 2):
The remuneration shall include the expenses, if any, incurred by the auditor in connection with the audit of the company and any facility extended to him but does not include any remuneration paid to him for any other service rendered by him at the request of the company.
I will discuss audit aspect of this chapter X of the Companies Bill, 2012 the Companies Act, 2013 in a future post.
Please note blog post is not a professional advice but general information about the subject covered here.