With the implementation of Companies Act, 2013, the Ministry of Corporate Affairs has notified the provisions relating to the rotation of auditors/audit firms, w.e.f. 01st April 2014.
With certain amendments, the new Companies Act makes it mandatory for a certain class of companies to appoint auditors for limited tenure after the implementation of the majority of provisions of Companies Act, 2013 coming into force w.e.f. 01st April 2014.
1. Statutory Provisions related to the rotation of Auditors/Audit Firm:
Chapter X of Companies Act, 2013, containing the ten sections from Section 139 to Section 148, covers the provisions related to Audit & Auditors. The Ministry of Corporate Affairs has also notified ‘The Companies (Audit and Auditors) Rules, 2014’ w.e.f. 01st April 2014.
Sec 139(2) of the Companies Act 2013, states that no listed company or a company belonging to such class or classes of companies as may be prescribed shall appoint or re-appoint
· any individual as an auditor for more than one term of 5 consecutive years
· an audit firm (including an LLP) as an auditor for more than two terms of 5 consecutive years
The term year has not been defined in the Act, but general interpretations suggest it to be a period of 12 months from the original date of the appointment unless otherwise stated.
2. Restrictions on re-appointment of Auditors and mandatory rotation of Auditors/Audit
The Companies Act 1956, did not contain any provision relating to restrictions or re-appointment of auditors. The same has been inserted in the Companies Act 2013 as a proviso to section 139(2).
According to the first proviso to Section 139(2) of Act:
(i) an individual auditor who has completed his original term of 5 consecutive years 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 original two terms of 5 consecutive years, shall not be eligible for re-appointment as auditor in the same company for five years from the completion of such term
The above implication gives the cooling period of 5 years to auditors after the tenure of their original term of appointment of 5 year/10 years, before being eligible for re-appointment. In simple words, the auditor as to wait for five years to be re-appointed.
Also, as per Companies Rules 2014, in case an auditor/audit firm breaks the term of 5 years, then also it shall be deemed to have completed the term and shall be liable to provisions of rotation/re-appointment.
2nd proviso of the section states 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. In other words, if a partner who was a part of the audit firm appointed by the company, whose term of 10 years has expired joins any other firm, then such firm also cannot be appointed as the auditor of the company for a period of 5 years, i.e. coolingperiod.
For the purpose of a class of companies Rule 5 of The Companies (Audit and Auditors) Rules, 2014 prescribes the following classes of companies excluding one-person companies and small companies:-
(a) all unlisted public companies having paid-up share capital of rupees 10 crores or more;
(b) all private limited companies having paid-up share capital of rupees 20 crores or more;
(c) 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 rupees 50 crores or more.
One person company and the small company shall have the meaning assigned in Section 2(62)&2(85), respectively, of the Act.
The 3rd proviso to Section 139(2) provides the transition period of 3 years to the companies existing on or before the commencement of this Act to comply with the requirements of these provisions within three years from the date of commencement of this Act. For, eg. If a company has an auditor/audit firm appointed for 5/10 years or more or say for 4/9 years or 3/8 years, then the company shall get a maximum of 3 years to continue the same auditors, i.e. up to the AGM for the FY 2016-17.
3. Manner of rotation of auditor by the companies
Rule 6 of The Companies (Audit and Auditors) Rules, 2014 prescribes the following manner of rotation of auditors by the companies:
(1) The Audit Committee shall recommend to the Board, the name of an individual auditor or of an audit firm who may replace the incumbent auditor on expiry of the term of such incumbent.
(2) Where a company is required to constitute an Audit Committee, the Board shall consider the recommendation of such committee. In other cases, the Board shall itself consider the matter of rotation of auditors and make its recommendation for the appointment of the next auditor by the members in the annual general meeting.
(3) For the purpose of the rotation of auditors-
(i) in case of an auditor (whether an individual or audit firm), the period for which the individual or the firm has held office as auditor prior to the commencement of the Act shall be taken into account for calculating the period of five consecutive years or ten consecutive years, as the case may be;
(ii) the incoming auditor or audit firm shall not be eligible if such an auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms.
Besides the above rotation, the members of the company may also 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) more than one auditor shall conduct the audit.
Author Details: Lavish Sharma (Institute of Law, Nirma University)
The views of the author are personal only. (if any)