AUDIT & AUDITORS. FIRST AUDITORS (Section 139) APPOINTMENT AT SUCCESSIVE GENERAL MEETING APPOINTMENT OF AUDITOR SECTION 139 TO 148 {CHAPTER X}

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Maximillian Hubbard
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AUDIT & AUDITORS FIRST AUDITORS (Section 139) IN CASE OF GOVERNMENT COMPANY Within SECTION 139 TO 148 {CHAPTER X} APPOINTMENT OF AUDITOR 60 days by Comptroller and AuditorGeneral.

OTHER COMPANIES INDIVIDUAL AUDITOR AUDIT FIRM ONE TERM OF FIVE YEARS TWO TERMS OF FIVE YEARS ANNUAL APPOINTMENT Within 30 days by Board of Director. Within 90 days at Extra Ordinary General Meeting.

1 AUDIT & AUDITORS FIRST AUDITORS (Section 139) IN CASE OF GOVERNMENT COMPANY Within SECTION 139 TO 148 {CHAPTER X} APPOINTMENT OF AUDITOR 60 days by Comptroller and AuditorGeneral. Within 30 days by Board of Director. Within 60 days at Extra Ordinary General Meeting. OTHER COMPANIES INDIVIDUAL AUDITOR AUDIT FIRM ONE TERM OF FIVE YEARS TWO TERMS OF FIVE YEARS ANNUAL APPOINTMENT Within 30 days by Board of Director. Within 90 days at Extra Ordinary General Meeting. APPOINTMENT AT SUCCESSIVE GENERAL MEETING Audit LISTED COMPANY/ PRESCRIBED CLASSES IN CASE OF OTHER COMPANIES Committee / Board to consider Auditor on the basis of qualification and experience. Auditor to hold office from first Annual General Meeting to sixth A.G.M. and thereafter till conclusion of every sixth AGM. Appointment ratified at every Annual General Meeting. Listed Companies or certain class or classes of companies shall appoint or reappoint an individual auditor-one term of 5 consecutive years. An audit firm- two terms of five consecutive Years each.

APPOINTMENT AT SUCCESSIVE GENERAL MEETINGS Cooling period of 5 years for an individual audit / audit firm.

In case of other companies there is no obligation to rotate the Auditor. A firm, which has common partners with the outgoing audit firm cannot be appointed as the auditor of the company.

Written consent of Auditor to be obtained. File notice of appointment with Registrar.

2 APPOINTMENT AT SUCCESSIVE GENERAL MEETINGS Cooling period of 5 years for an individual audit / audit firm. The period of holding office by the auditor prior to commencement of Act shall be accounted in calculating the period of five consecutive years or ten consecutive years. In case of other companies there is no obligation to rotate the Auditor. A firm, which has common partners with the outgoing audit firm cannot be appointed as the auditor of the company. APPOINTMENT AT SUCCESSIVE GENERAL MEETINGS Auditing partner shall be rotated at such intervals as may be resolved by members. Audit may be conducted by more than one auditor. Written consent of Auditor to be obtained. File notice of appointment with Registrar. Provisions will have to be complied within a period of three years / SUGGESTIONS Section 139 (2) No listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint or re-appoint an individual / audit firm as auditor for more than one / two term(s) of five consecutive years. Provided that: an individual auditor/ firm who/which has completed his term(s) shall not be eligible for re-appointment as auditor in the same company for five years from the completion of his term. Rule 10.4 (4) of the Draft Rules reads as: For the purpose of the rotation of auditors: In case of an auditor (whether an individual or audit firm), the period for which he or it has been holding office as auditor prior to the commencement of the Act shall be taken into account in calculating the period of five consecutive years or ten consecutive years, as the case may be. / SUGGESTIONS Prior to the commencement of the Act, there may be no appointment of auditor for a term of five years at all. Even if an auditor has been holding his office for 5 years under the 1956 Act, it is not one term of 5 years, but 5 terms of one year each. If an auditor gets re-appointed, it does not mean the term is any longer than annual. Can this provision not be circumvented by Companies by appointing auditors for Four or less years as Auditors and thereafter taking a cooling period of one year and again reappointing the earlier Auditors for another Four or less years and so on... The Act is applicable in its entirety prospectively.

3 / SUGGESTIONS The meaning of the words more than one Auditor is not clear as to whether by more than one audit Partner within the Firm or the audit should be conducted jointly by two or more Auditors whether individually or by Firms or a combination of both. Increases audit cost, burden on companies and increase in the risks of non detection of fraud upon the incumbent auditor. New auditor will have no time for understanding the intricacies of business of the company. DEATH/ INCAPACITY VACANCY RESIGNATION DISQUALIFICATION REMOVAL RETIREMENT APPOINTED BY COMPANY IN GENERAL MEETING WITHIN 3 MONTHS APPOINTED BY BOARD OF DIRECTORS WITHIN 30 DAYS ANY PERSON CONCERNED BY TRIBUNAL SUO MOTU COMPANY BY SPECIAL RESOLUTION + CG APPROVAL APPLICATION BY CG CASUAL VACANCY/ REMOVAL CASUAL VACANCY: Death; Incapacity; or disqualification., shall be filled by the Board of Directors within 30 days. RESIGNATION : Appointed by Company in General Meeting within 3 months. Reason for resignation to be given to the Company/ Registrar. REMOVAL: Company by passing special resolution in General Meeting with the previous approval of Central Government. Application by Central Government. Suo- Motu. Any person concerned. CASUAL VACANCY/ REMOVAL REMOVAL BY COMPANY:- The auditor appointed may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government. REMOVAL BY TRIBUNAL:- If the tribunal on application by the person concerned is satisfied that the auditor has acted in a fraudulent manner or abetted or colluded in any fraud, the tribunal may direct the Company to change the auditor. Such auditor shall not be eligible to be appointed as an auditor of any company for a period of five years.

RE-APPOINTMENT OF RETIRING AUDITOR A retiring auditor may be re-appointed at an annual general meeting: if he is not disqualified for re-appointment; he has not given the company a notice in writing

QUALIFICATION AND DISQUALIFICATION OF AUDITOR (Section 141) The 2013 Act includes the following additional disqualification: A person holding securities of the Company exceeding the face value of Rs.

Any person who has a business relationship with the company / its subsidiary / associate / its holding company /subsidiary or associate of its holding company (business relationship disqualification).

4 RE-APPOINTMENT OF RETIRING AUDITOR A retiring auditor may be re-appointed at an annual general meeting: if he is not disqualified for re-appointment; he has not given the company a notice in writing of his unwillingness to be re-appointed; and a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be reappointed. QUALIFICATION AND DISQUALIFICATION OF AUDITOR (Section 141) The 2013 Act includes the following additional disqualification: A person holding securities of the Company exceeding the face value of Rs. 1,000/- or such sum as may be prescribed or indebted to the Company, or given guarantee or provided security to any person indebted by the Company. Any person who has a business relationship with the company / its subsidiary / associate / its holding company /subsidiary or associate of its holding company (business relationship disqualification). A person whose relative is a non-executive / executive director or key managerial personnel of the company. QUALIFICATION AND DISQUALIFICATION OF AUDITOR (Section 141) 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. A person who is in full-time employment elsewhere. Any person whose appointment will result in the person being the auditor of more than 20 companies. Any person whose subsidiary or associate or any other form of entity is engaged in providing non-audit services as on the date of appointment (non-audit services disqualifications). The reference to a Partner of a Firm in section 141(g) instead of Partner in a Firm as is contained in Section 224 of the Companies Act PERSON is not defined in the Act. To attract disqualification, whether the firm should itself hold any security or interest etc. in the company? Also, if a partner or his relative is holding security, whether the firm will be disqualified? Also, where one partner is individually holding appointment as auditor in more than 20 companies, whether his firm will be disqualified?

Keeping track of whether any relative is holding any security above rupees one thousand (or the prescribed amount) or is indebted to the audited company is going to be extremely difficult.

Whether signing of consolidated financial statement in addition to the stand alone financial statements of the company would be construed as a separate audit assignment to be covered under the limit

5 Keeping track of whether any relative is holding any security above rupees one thousand (or the prescribed amount) or is indebted to the audited company is going to be extremely difficult. The existing limit of undertaking audit of 20 companies per partner though continues under the Act, this limit will now apply while appointing auditors of private companies as well. Whether signing of consolidated financial statement in addition to the stand alone financial statements of the company would be construed as a separate audit assignment to be covered under the limit of 20 companies. Tribunal s authority to suo-motu change the auditor and consequent ineligibility of such auditor, to act as an auditor for any company is quite punitive. A routine vendor relationship or any relationship with distantly related entity such as a fellow subsidiary may disqualify the firm. Whether a person / firm i.e. engaged in providing non-audit service is dis-qualified to be the auditor of any company or such person / firm is disqualified to be the auditor of only the company to which such non-audit services are rendered. RESTRICTION ON NUMBER OF AUDITS 1956 LAW: An individual cannot be appointed as auditor for more than 30 companies. An individual cannot be an auditor for more than 20 public companies and of which not more than 10 companies should have a paid up share capital of more than Rs 25 lakh LAW: Restricts the number of audits to 20 companies for an individual / partner. Private companies will also be considered for calculating the limit of 20 audits per partner. POWERS AND DUTIES Right of access to records of all its subsidiaries. Examined accounting and auditing standards. Auditor s Report shall state: Any qualification, reservation or adverse remark Adequate internal financial Controls system. Disclosed the effect of pending litigations on its financial position. Provision for foreseeable losses. Delay in depositing money in IEPF. Whistle blower policy introduced.

Definition of ambiguous. Impossible to detect all fraud. fraud is very wide and Effectiveness of Internal control highly subjective. Likely difference of opinion as to existence of fraud or otherwise.

AUDIT & AUDITORS Auditor s remuneration Auditor not to render certain services: accounting and book keeping services; internal audit; design and implementation of any financial information system;

6 Definition of ambiguous. Impossible to detect all fraud. fraud is very wide and Effectiveness of Internal control highly subjective. Likely difference of opinion as to existence of fraud or otherwise. Conflict between auditor(s) of holding company/ subsidiary company. AUDIT & AUDITORS Auditor s remuneration Auditor not to render certain services: accounting and book keeping services; internal audit; design and implementation of any financial information system; actuarial services, management services. investment advisory services; investment banking services; or rendering of outsourced financial services. Auditor to sign Auditors Report. AUDIT AND AUDITOR LIABILITY: Concept of class-action lawsuit introduced. Shareholders and depositors can now claim damages and compensation from auditors for negligence. The liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report PENALTY: Normal punishment with a fine of Rs. 25,000 and Rs.5 lakh. Other punishment will be imprisonment upto 1 years fine between Rs. 1 lakh and Rs. 25 lakh. The term "intention to deceive" or "any other person concerned or interested in the company", improper or misleading statement of particulars, any likely act wrongful act or conduct are vague. Potential unlimited liability on auditor may result in adverse impact on auditing profession and may give rise to long disputes. Auditors may have to take indemnity insurance cover against third party liability which might be expensive. Audit firms will have to increase the support staff to do a more rigorous checking of the accounts. Auditors are more likely to become conservative and ask for more details of expenses and statements from managements.

SITUATION ABC Limited is a public limited Company and has not filed its Annual Accounts for the past ten years. The Company had no business operations since past two decades.

7 SITUATION ABC Limited is a public limited Company and has not filed its Annual Accounts for the past ten years. The Company had no business operations since past two decades. The AGM/GM of the Company have been stayed by the Hon ble Courts for over a decade. The Auditor of the Company refuses to audit the Accounts as there are parallel Boards and shareholdings in the company. Under the new enactment, if the company does not file the Annual Accounts for three years from the commencement of the Act, the directors will have to vacate the office under section 167 of the Act. What remedy do the Directors have to protect their Directorships?

Audit & Auditors. Sec 139 Appointment of Auditors

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