True and fair Audits are core concern for corporate world and its regulators. The manner of appointment of auditors may affect independence of audit. Section 139 of the Companies Act 2013 discussed earlier here, discuss appointment of auditor in detail.
The Companies (Audit and Auditors) Rules 2014 further prescribes tasteless syrup with bitter pills recommended under Chapter X of the Companies Act 2013.
Selection and Appointment of Auditor:
In case of a company that is required to constitute an Audit Committee under section 177, the committee, and, in cases where such a committee is not required to be constituted, the Board, shall take into consideration the qualifications and experience of the individual or the firm proposed to be considered for appointment as auditor and whether such qualifications and experience are commensurate with the size and requirements of the company. [Sub – Rule (1) of Rule 3]
First reading of language suggest the “and” actually is the “or”. The proviso to this sub – rule also support this first reading. Sub – rule also support this view. However, we may read this as in “and” to cast responsibility to the committee as well as the Board for a selection process to make two – step verification during selection before actual appointment of auditor.
While considering the appointment, the Audit Committee or the Board, as the case may be, shall have regard to any order or pending proceeding relating to professional matters of conduct against the proposed auditor before the Institute of Chartered Accountants of India or any competent authority or any Court. [Proviso to sub – Rule (1) of Rule 3]
A company needs to create a process to check any above mentioned order or proceeding before selection of auditor. Possible support comes from sub – rule 2 of Rule 3 and Rule 4.
The Audit Committee or the Board, as the case may be, may call for such other information from the proposed auditor as it may deem fit. [Sub – Rule (2) of Rule 3]
Where a company is required to constitute the Audit Committee, the committee shall recommend the name of an individual or a firm as auditor to the Board for consideration and in other cases, the Board shall consider and recommend an individual or a firm as auditor to the members in the annual general meeting for appointment. [Sub – Rule (3) of Rule 3]
The process is of three stages:
- recommendation by audit committee,
- consideration and further recommendation,
- consideration in annual general meeting.
If the Board agrees with the recommendation of the Audit Committee, it shall further recommend the appointment of an individual or a firm as auditor to the members in the annual general meeting. [Sub – Rule (4) of Rule 3]
Oh God!! This sub – rule (4) must be an offering for great god of corporate laws in India, if god fails to accept offering of sub – rule (3) of rule 3.
If the Board disagrees with the recommendation of the Audit Committee, it shall refer back the recommendation to the committee for reconsideration citing reasons for such disagreement. [sub – rule (5) of Rule 3]
The words “refer back” are not clear to me. May it means “look again the recommendation” or “send back”?
In case of any disagreement with recommendation of the audit committee, the board may, communicate its observations in writing and ask audit committee to reconsider its recommendations.
If the Audit Committee, after considering the reasons given by the Board, decides not to reconsider its original recommendation, the Board shall record reasons for its disagreement with the committee and send its own recommendation for consideration of the members in the annual general meeting; and if the Board agrees with the recommendations of the Audit Committee, it shall place the matter for consideration by members in the annual general meeting. [sub – rule (6) of Rule 3]
Devil may laugh here, considered and re – considered recommendations of audit committee goes to dust – bin and cost of keeping audit committee really become cost here. I do not understand, why re –consideration exercise is recommended in these rules when this sub – rule makes a mockery of all these earlier sub – rules.
Simple, polite interpretation is; after two times offering of tea to members of audit committee, board may show audit committee a door.
This is also clear, members may have to stamp recommendation of board and have no option to know or in any manner consider considered or reconsidered recommendations of audit committee. They may reject resolution only on personal knowledge.
The auditor appointed in the annual general meeting shall hold office from the conclusion of that meeting till the conclusion of the sixth annual general meeting, with the meeting wherein such appointment has been made being counted as the first meeting. [Sub – Rule (7) of Rule 3]
Such appointment shall be subject to ratification in every annual general meeting till the sixth such meeting by way of passing of an ordinary resolution. [Proviso to Sub – Rule (7) of Rule 3]
I am also looking for purpose of annual exercise of ratification of five year appointment of auditor. What will be position, if members simple deny ratification without any exercise or intention of removal of auditor? Answer is offered by the Explanation to this (sub-) rule.
For the purposes of this rule, it is hereby clarified that, if the appointment is not ratified by the members of the company, the Board of Directors shall appoint another individual or firm as its auditor or auditors after following the procedure laid down in this behalf under the Act.
I understand, when members deny annual ratification, they lost their right to appoint or ratify an auditor, outgoing auditor lost his right to be heard.
This is also not clear, if whether audit committee shall or not recommend, to the board regarding appointment of auditor under explanation to sub – rule (7) to rule 3.
Appointment of an auditor under explanation to sub – rule (7) to rule 3, is not an appointment under sub – section (8) of Section 139 of the Act.
I am not clear, whether appointment under explanation to sub – rule (7) to rule 3 is for remaining period of the original appointment, not ratified in general meeting or only up to the conclusion of next general meeting.
Conditions for Appointment:
The auditor appointed under rule 3 shall submit a certificate that –
- the individual or the firm, as the case may be, is eligible for appointment and is not disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the rules or regulations made thereunder;
- the proposed appointment is as per the term provided under the Act;
- the proposed appointment is within the limits laid down by or under the authority of the Act;
- the list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct. [Rule 4(1)]
The notice to Registrar about appointment of auditor under fourth proviso to sub-section (1) of section 139 shall be in Form ADT-1. [Rule 4(2)]
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Is it possible to appoint the auditor only for a period of 1 year with reappointment in following yera in the case of a small private limited company?
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If company appoint one audit firm for the period of 5 year but now at the 2nd financial year company want to appoint another firm for audit what procedure they will follow?
The procedure for the appointment of co-auditor or joint auditor is the same as the appointment of a single auditor.