Amended and updated notes on section 139 of Companies Act 2013. Detail discussion on provisions and rules related to appointment of auditors.
Chapter X (Sections 139–148) of the Companies Act, 2013 (CA 2013) deals with the provisions related to audit and auditors. Section 139 of CA 2013 provides for appointment of auditors.
Recently, we have discussed in detail section 138 (Internal Audit) of CA 2013. Today, we learn the provisions of section 139 of Companies Act 2013.
The provisions of section 139 are effective from 1-April-2014. You may refer Notification No. S.O. 902(E) issued dated 27.03.2014. In this article, you will learn detail of the provisions of section 139 of the Companies Act 2013 read with the Companies (Audit and Auditors) Rules, 2014.
An auditor of a company must be either a Chartered Accountant or a CA Firm whereof majority of partners are practicing in India. The appointed auditor may be either an Individual Chartered Accountant or an Audit Firm including Limited Liability Partnership. For details, you may refer the provisions of section 141 of the Companies Act, 2013.
| Name of Act | The Companies Act 2013 |
|---|---|
| Enacted by | Parliament of India |
| Administered by | Ministry of Corporate Affairs (MCA) |
| Number of Chapters | 29 |
| Number of Sections | 484 (470-43+57) |
| Number of Schedules | 7 |
| You are reading: | |
| Chapter No. | X |
| Chapter Name | Audit and Auditors |
| Section No. | 139 |
| Section Name | Appointment of Auditors |
| Monthly Updated Edition | Company Law PDF |
Appointment and Selection Process of an Auditor in a Company
Every company appoints an Individual Chartered Accountant or a CA firm as an auditor at the first AGM (Annual General Meeting) of the company. Appointed auditor at first AGM shall hold office till the conclusion of its 6th AGM and thereafter till the conclusion of every sixth meeting.
Appointing auditor shall give written consent and a certificate that the appointment or re-appointment is in accordance with prescribed conditions and satisfies the criteria provided in section 141. The company shall inform the appointed auditor and Registrar within 15 days of the meeting in which the auditor is appointed.
Here is the point wise notes on the provisions of sub-section (1) of section 139 of the Companies Act, 2013. You may read section 139(1) with Rule 3 and Rule 4 of the Companies (Audit and Auditors) Rules, 2014.
Procedure of Selection of Auditor:
The manner and procedure of selection and appointment of auditors has been prescribed in Rule 3 of the Companies (Audit and Auditors) Rules, 2014. In a brief, the selection procedure of auditor would be as under:
1) Qualifications and Experience of Proposed Auditor:
The competent authority shall take into consideration the qualifications and experience of proposed auditor. It also check if there is any order or pending proceeding relating to professional matters of conduct against the proposed auditor before the ICAI or any Court.
Who is the competent authority? The competent authority is an Audit Committee if required under section 177. Otherwise, the Board would be competent authority.
2) Recommendation of Proposed Auditor:
The name of an individual CA or a CA firm shall be:
- Recommended by the Audit Committee to the Board for consideration; or
- Considered and recommended by the Board to the member for appointment in AGM.
That means, if there is an audit committee, the committee shall recommend the name of an individual or a firm as auditor to the Board for consideration.
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 AGM. However, 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.
In other case, the Board shall consider and recommend the name of proposed auditor to the members in the AGM for appointment.
3) Period of Office:
Such appointed auditor shall hold office from the conclusion of first (1st) AGM to the conclusion of sixth (6th) AGM and thereafter till the conclusion of every sixth meeting.
Therefore, if auditor is appointed in May 2019 (1st AGM) then the appointed auditor will hold office till May 2024 (6th AGM).
Written Consent and Certificate from Auditor:
Before such appointment is made, the written consent shall be obtained from the auditor to such appointment. The appointed auditor shall submit a certificate in accordance with the following prescribed conditions in sub-rule (1) of Rule 4 of the Companies (Audit and Auditors) Rules, 2014. The certificate states the following:
(a) Eligible: The proposed auditor is eligible for appointment. He is not disqualified for appointment under the Companies Act, 2013, the Chartered Accountants Act, 1949 and the rules or regulations made thereunder;
(b) Terms: The proposed appointment is as per the term provided under the Companies Act, 2013;
(c) Limit: The proposed appointment is within the limits laid down by or under the authority of the Companies Act, 2013;
(d) Proceedings: 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.
Note that the certificate shall also indicate whether the auditor satisfies the criteria provided in section 141.
Notice to Registrar: The Company shall inform the auditor concerned of his or its appointment, and also file a notice in Form ADT-1 [Sub-Rule (2) of Rule 4] of such appointment with the Registrar within 15 days of the meeting in which the auditor is appointed.
ADT-1 shall be pre-certified by the Chartered Accountant (CA) or the Company Secretary (CS) or as the case may be the Cost Accountant (CMA), in whole-time practice.
Tenure of Appointment and Rotation of Auditors in a Company
Now, we are discussing the provisions of sub-section (2), (3) and (4) of section 139 of the companies Act, 2013. Individual Auditors are compulsorily required to be rotated in every 5 years. Whereas, the Audit Firm is required to be rotated in every 10 years in all listed companies and other prescribed companies.
The Central Government has prescribed the rules and manner in which such companies shall rotate their auditors in pursuance of sub-section (2) of section 139. I opine that these mandatory provisions and rules for rotation of auditors will definitely strengthen the independency among auditors and prevent auditors to make a close relationship with managers.
Tenure of Appointment of Individual or Audit Firm as Auditor
According to section 139(2), a listed or prescribed class of company shall not appoint/ re-appoint an Individual Auditor for more than ONE term of five consecutive years. An Audit Firm shall not be appointed or re-appointed for more than TWO terms of five consecutive years.
Class of Companies:
The class or classes of companies prescribed in Rule 5 of Companies (Audit and Auditors) Rules, 2014 are as under:
1) Unlisted Public Companies: All unlisted public companies having paid up share capital of ≥ ₹10 Crore;
2) Private Companies: All private limited companies having paid up share capital of ≥ ₹50 Crore;
3) Other Companies: All companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of ≥ ₹50 Crores.
Note that such prescribed companies does not include any One Person Companies (OPC) and Small Companies.
Thus, an unlisted public company having Paid-up Share Capital (PSC) of less than ₹10 crore but having public borrowings of ₹50 crores or more shall not appoint or re-appoint individual/firm as auditor for more than one/two term(s) of five consecutive years.
Similarly, a private limited company having ₹50 Crores or more public borrowings shall not appoint or re-appoint individual auditor for more than one term or an audit firm for more than two terms even if such private limited company have less than ₹50 Crore PSC.
Moreover, any CA as well as CA Firm shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of his/its term.
Common Partner:
As per second proviso of sub-section (2) of section 139, any audit firm shall not be appointed as auditor of a company for a period of five years if it has common partner(s) to the other audit firm, whose tenure has already expired in the same company immediately preceding the financial year.
Thus, an audit firm which has common partner with outgoing audit firm shall not be appointed as the auditor of the company.
However, the company may remove an auditor or the auditor may resign from such office of the company without prejudice to the provisions of sub-section (2) of section 139 of the Companies Act, 2013. Therefore, an auditor can resign himself before completion of his term as an auditor of a company and on the other hand, the shareholders can remove auditors before expiry of the terms as discussed above.
Rotation of Auditors or Auditing Partner of Audit Firm by Company
Now, we will discuss the actual process and manner in which the auditors (individual or audit firm) shall be rotated in a company. The Board of Directors shall consider the matter of rotation of auditors and make its recommendation for appointment of the next auditor by the members in AGM.
However, if the company has constituted Audit Committee, the Board shall firstly consider the recommendation made by such committee to replace the incumbent auditor on expiry of his term.
By passing a resolution, the members of a company may provide to rotate the auditing partner in the appointed audit firm at such intervals as may be resolved by members. They may also resolve that the audit shall be conducted by more than one auditor i.e. joint auditors by virtue of sub-section (3) of section 139.
We have already discussed in above paragraphs that an individual auditor shall not be appointed or re-appointed for a period of more than 5 consecutive years. That period of five years shall be replaced with 10 years in case of an audit firm appointed or re-appointed in a company.
For the purpose of the rotation of auditor, sub-rule (3) of Rule 6 of the Companies (Audit and Auditors) Rules, 2014 states that the incoming CA or CA Firm shall not be eligible if such CA or CA Firm is associated with the outgoing auditor or audit firm under the same network of audit firms. Same network means same brand name, trade name or common control.
Appointment of First Auditors in a Company under Companies Act 2013
The provisions of sub-section (6) of the companies Act, 2013 deals with the appointment of first auditor of a company other than a Government Company. Whereas section 139(7) of the Companies Act, 2013 contains provisions regarding the appointment of first auditor of a Government Company.
The first priority to appoint the first auditor of a company has been given to the Board of Directors (BOD) of the company otherwise the members of the company shall appoint such auditor. On the other hand, the Comptroller and Auditor General (CAG) of India has power to appoint the first auditor of a Government Company.
The first auditor shall hold the office till the conclusion of first AGM irrespective of appointed authority viz. CAG, Board, and Members of the company. To know the tenure of subsequent auditor please read Tenure of Appointment and Rotation of Auditors in a Company.
1) First Auditor of other than Government Company [Section 139(6)]:
The first auditor of the company shall be appointed by the Board within 30 days of incorporation. In case of failure by the Board, the first auditor shall be appointed at an EGM within 90 days.
The appointed first auditor in a company other than Govt. Co. shall hold office till the conclusion of the first Annual General Meeting (AGM) of the company.
A) 1st Auditor Appointed by Board:
The first auditor of the company other than Government Company shall be appointed by the Board of Directors within 30 days from the date of registration of the company.
Note that section 139(6) of the Companies Act, 2013 authorizes only to the Board of Directors to appoint the first auditor of the company. Therefore, any director including Managing Director (MD) or Whole-time Director (WD) or Manager shall not be allowed to appoint personally the first auditor of the company otherwise it violates the provisions of sub-section (6) of the CA 2013.
B) 1st Auditor Appointed by Members:
In case of failure by the Board, the members shall be informed and they shall appoint first auditor within 90 days at an extraordinary general meeting.
Note that the Act is silent about the date from which the ninety days shall be counted. In my opinion the said 90 days should be counted from the date of incorporation.
Also note that such appointed first auditor shall hold office till the conclusion of the first annual general meeting.
2) First Auditor in Government Company [Section 139(7)]:
First auditor in Govt. Co. shall be appointed by CAG and in case CAG fails to appoint such auditor then BOD shall appoint and if Board does not appoint such auditor the members of the company shall appoint the first auditor of the company.
Such appointed auditor shall hold office till the conclusion of the first Annual General Meeting (AGM) of the company.
A) 1st Auditor in Govt. Co. Appointed by CAG:
The Comptroller and Auditor General (CAG) of India shall appoint first auditor of the following companies within 60 days from the date of registration of the company:
- A Government Company; or
- Any other company owned or controlled, directly or indirectly, by
- The Central Government; or
- Any State Government, or Governments; or
- Partly by the Central Government and partly by one or more State Governments.
B) 1st Auditor in Govt. Co. Appointed by Board:
In case the Comptroller and Auditor-General of India does not appoint such auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next 30 days.
In other words, the first auditor of the government company shall be appointed by the Board of Directors of the company if the CAG of India does not appoint first auditor within the 60 days from the date of registration of the company.
C) 1st Auditor in Govt. Co. Appointed by Members:
In the case of failure of the Board to appoint such auditor within the next thirty days, it shall inform the members of the company who shall appoint such auditor within 60 days at an extraordinary general meeting.
Thus, the members of the Govt. company shall appoint first auditor if the CAG and BOD fails to appoint first auditor of the government company.
Have you noticed that the time limit has not been specified for informing members by the Board of Directors of the company in case the Board fails to appoint first auditor within specified period of 30 days.
Whether Form ADT-1 is mandatory to file for Appointment of First Auditors
As per sub-rule (2) of Rule 4 “Conditions for appointment and notice to Registrar” of the Companies (Audit and Auditors) Rules, 2014, the information for appointment of Auditor under fourth proviso to sub-section (1) of section 139 are required to be send to the Registrar by Company in the prescribed Form ADT-1. We know that section 139(1) deals with the appointment of subsequent auditors rather the first auditor of the company.
Further, the help file (Instruction Kit) states that the purpose of eForm ADT-1 is to file a notice to Registrar of Companies (ROC) on appointment/ reappointment of an auditor at the Annual General Meeting whereas the first auditor shall hold office till the conclusion of first AGM.
Thus, it is quite clear that government has given relaxation to the company and therefore the appointment of first auditor does not require filing ADT-1. However, the company may file ADT-1 if it thinks otherwise. Your opinion is also welcome in this regard.
Section 139 of Companies Act 2013: Appointment of auditors
Section 139 shall come into force on 1st April, 2014 vide Notification No. S.O. 902(E) issued dated 27.03.2014.
(1) Subject to the provisions of this Chapter, every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting and the manner and procedure of selection of auditors by the members of the company at such meeting shall be such as may be prescribed:
Provided that the company shall place the matter relating to such appointment for ratification by members at every annual general meeting: [Omitted w.e.f. 7th May 2018]
Provided further that before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him or it that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor:
Provided also that the certificate shall also indicate whether the auditor satisfies the criteria provided in section 141:
Provided also that the company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar within fifteen days of the meeting in which the auditor is appointed.
Explanation: For the purposes of this Chapter, “appointment” includes reappointment.
(2) No listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint or re-appoint—
- (a) an individual as auditor for more than one term of five consecutive years; and
- (b) an audit firm as auditor for more than two terms of five consecutive years:
Provided that—
- (i) an individual auditor who has completed his term under clause (a) shall not be eligible for re-appointment as auditor in the same company for five years from the completion of his term;
- (ii) an audit firm which has completed its term under clause (b), shall not be eligible for re-appointment as auditor in the same company for five years from the completion of such term:
Provided further that as on the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of five years:
Provided also that every company, existing on or before the commencement of this Act which is required to comply with the provisions of this sub-section, shall comply with requirements of this sub-section within a period which shall not be later than the date of the first annual general meeting of the company held, within the period specified under sub-section (1) of section 96, after three years from the date of commencement of this Act.
Provided also that, nothing contained in this sub-section shall prejudice the right of the company to remove an auditor or the right of the auditor to resign from such office of the company.
(3) Subject to the provisions of this Act, members of a company may resolve to provide that—
- (a) in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members; or
- (b) the audit shall be conducted by more than one auditor.
(4) The Central Government may, by rules, prescribe the manner in which the companies shall rotate their auditors in pursuance of sub-section (2).
Explanation: For the purposes of this Chapter, the word “firm” shall include a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008.
(5) Notwithstanding anything contained in sub-section (1), in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, the Comptroller and Auditor-General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of one hundred and eighty days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting.
(6) Notwithstanding anything contained in sub-section (1), the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within thirty days from the date of registration of the company and in the case of failure of the Board to appoint such auditor, it shall inform the members of the company, who shall within ninety days at an extraordinary general meeting appoint such auditor and such auditor shall hold office till the conclusion of the first annual general meeting.
(7) Notwithstanding anything contained in sub-section (1) or sub-section (5), in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and partly by one or more State Governments, the first auditor shall be appointed by the Comptroller and Auditor-General of India within sixty days from the date of registration of the company and in case the Comptroller and Auditor-General of India does not appoint such auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next thirty days; and in the case of failure of the Board to appoint such auditor within the next thirty days, it shall inform the members of the company who shall appoint such auditor within the sixty days at an extraordinary general meeting, who shall hold office till the conclusion of the first annual general meeting.
(8) Any casual vacancy in the office of an auditor shall—
- (i) in the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within thirty days, but if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting;
- (ii) in the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-General of India within thirty days:
Provided that in case the Comptroller and Auditor-General of India does not fill the vacancy within the said period, the Board of Directors shall fill the vacancy within next thirty days.
(9) Subject to the provisions of sub-section (1) and the rules made thereunder, a retiring auditor may be re-appointed at an annual general meeting, if—
- (a) he is not disqualified for re-appointment;
- (b) he has not given the company a notice in writing of his unwillingness to be re-appointed; and
- (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.
(10) 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.
(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.
Exception/ Modification/ Adaptation:
1) In case of a Specified IFSC public company, in fourth proviso to sub section (1) of section 139, for the words “fifteen days” read as “thirty days”. –Notification No. G.S.R. 08(E) dated 4th January, 2017.
2) In case of a Specified IFSC public company, all provisos to subsection (2) of section 139 shall not apply. –Notification No. G.S.R. 08(E) dated 4th January, 2017.
3) In case of a Specified IFSC private company, in fourth proviso to subsection (1) of section 139, for the words “fifteen days” read as “thirty days”. –Notification No. G.S.R. 09(E) dated 4th January, 2017.
4) In case of a Specified IFSC private company, all provisos to subsection (2) of section 139 shall not apply. –Notification No. G.S.R. 09(E) dated 4th January, 2017.