In India, the Companies Auditors under the Companies Act, 2013 outlines a systematic process for the appointment of auditors. In the corporate world, it is crucial to ensure that the financial integrity and transparency is in the operational system of the Company. The Appointment of Auditors not only protects the interests of stakeholders but also upholds the accountability of businesses. This article gives you key facts about the appointment of the auditors under the Companies Act, 2013. Furthermore, throws some light on the legal process, and companies requirement to appoint the auditors.

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Short note on Auditors

Auditors are financial professional who maintains the financial statements, transactions, and records of an organization. To ensure the company’s accuracy, transparency and compliance with appropriate laws and regulations. They play a significant role in verifying the security of financial information presented by the companies, non-profit organizations, government agencies and other entities.

Their primary objective is to provide an independent and unbiased assessment of a company’s financial information, internal controls, and overall financial health. They are helping in the identify errors, discrepancies, or fraudulent activities in financial statements, ensuring that the financial information accurately reflects the organization’s true financial position and performance.

Types of Auditors

There are several types of auditors, are as:

• Internal Auditor: Internal auditors work to prevent fraud, waste, and mismanagement within the organization. They are focusing on assessing and improving the organization’s internal controls, risk management processes, and operational efficiency. Internal auditors are employees of the organization they audit. 
• External Auditor: Also known as an independent auditor. External auditors help in maintaining the transparency and accountability and provide an unbiased opinion on the accuracy of financial statements. An external auditor is not employed by the entity being audited. Instead, they are hired by the organization to provide an objective assessment of its financial records. 
• Information Systems Auditor: Also known as IT auditors, they evaluate a company’s information systems, data security measures, and technology-related controls to ensure the integrity, confidentiality, and availability of information.
• Government Auditor: Government auditors review the financial records and operations of government agencies. They also ensure that the compliance with laws, regulations, and proper use of public funds.
• Forensic Auditor: Forensic auditors specialize in investigating financial irregularities, fraud, and financial disputes. They use their skills to uncover evidence and analyse financial data for legal purposes.

Eligibility Criteria for Appointment of the Auditor under the Companies Act, 2013

According to the section 141 of the Companies Act, 2013. The auditor must have a Chartered Accountant or can be a firm of Chartered Accountants. It means that the individual auditor or at least one of the partners in the audit firm must hold a valid certificate from the Institute of Chartered Accountants of India (ICAI).

Here are certain persons who shall not be eligible for appointment as auditors of a company:

• Employees and Officers: Employees, partners or officers, of an entity or its subsidiary, associate, or holding company cannot be appointed as auditors. They are maintaining independency and avoid conflicts of interest.
• Persons with Business Relationships: Those who have a business relationship with the company, such as providing consultancy or advisory services, cannot be appointed as auditors. This helps maintain independence and prevent undue influence.
• Persons in Default: Individuals or firms who are in default of payment of any dues to the company. It includes the loans, deposits, or other amounts, are disqualified from being appointed as auditors.
• Persons with Shareholding: If in case any individual who holds a substantial interest in the company’s shares, or is a partner or director of a company that holds such interest. Those are not appointed as an auditor.
• Past Violations: Those who have been found guilty of fraud, forgery, or similar offences. Then the company are disqualified from being appointed as auditors.
• Director’s relatives: Company’s directors have relatives, including spouses and minor children, are ineligible for appointment as auditors to prevent potential biases and conflicts of interest.
• Professionals Providing Certain Services: Individuals or firms engaged in rendering specified non-audit services to the company, such as accounting, bookkeeping, valuation, investment advisory, etc., are disqualified from being appointed as auditors.
• Former Auditors with Outstanding Dues: If a former auditor has outstanding fees or dues from a previous audit. Then they cannot be reappointed as the company’s auditor.

Procedure for Appointment of the Auditors under Companies Act, 2013

The procedure has mentioned under the provision of section 139 of the Act that the Appointment of Auditors:

• First Auditor: For a newly incorporated company, the first auditor is appointed by the Board of Directors within 30 days from the date of incorporation. The appointment is reasonable till the conclusion of the first Annual General Meeting (AGM).
• Subsequent Auditor Appointments (AGM): For subsequent years, the appointment of auditors is done at the AGM. Here’s how the process typically works:
• Eligibility Verification: The company verifies the eligibility of the proposed auditor by checking their qualifications, independence, and any disqualifications.
• Obtain Consent and Eligibility Certificate: The proposed auditor or the audit firm should provide written consent to act as an auditor and an eligibility certificate confirming that they meet all the eligibility criteria as per the Companies Act.
• Resolution for Appointment: The company’s Board of Directors proposes the appointment of the auditor, and a resolution for their appointment is included in the notice for the AGM. The resolution must have mentioned the auditor’s name, qualifications, and the terms of appointment.
• Shareholder Approval: The shareholders consider and approve the resolution for the appointment of the auditor during the AGM.
• Ratification of Appointment: In subsequent AGMs, the appointment of the auditor is typically ratified by the shareholders. While this is not mandatory, it helps in expressing confidence in the auditor’s appointment.
• Intimate the Registrar of Companies (RoC): The company is required to file Form ADT-1 with the RoC within 15 days of the AGM, informing them about the appointment of the auditor.
• Filling Casual Vacancies: If a casual vacancy arises due to the resignation, death, disqualification, or removal of an auditor, the Board of Directors can appoint a new auditor. However, the appointment must be ratified by the shareholders in the next general meeting.
• Term and Rotation: The term of the auditor is generally for five consecutive years. For certain classes of companies, auditor rotation is mandatory to ensure independence. After completing the maximum term, there must be a cooling-off period before the same auditor can be reappointed.
• Removal of Auditor: An auditor can be removed before the completion of their term by passing a special resolution in a general meeting. However, proper procedures and provisions of the Companies Act must be followed.

Why Companies need to Appoint the Auditors?

Here are certain reasons why Companies are required to Appoint the Auditors are:

• Independent Verification of Financial Statements: Auditors provide an independent and objective assessment of a company’s financial statements. They review the financial transactions, statements to ensure accuracy and records, completeness, and compliance with accounting standards and other relevant laws.
• Detection of Errors and Fraud: Auditors play a crucial role in detecting errors, irregularities, and fraudulent activities within a company’s financial records. Their thorough examination helps identify any discrepancies that might indicate financial mismanagement or misconduct.
• Stakeholder’s Assurance: For Auditor’s appointment have to take assurance to several stakeholders. They are shareholders, investors, creditors, and regulators, that the company’s financial information is reliable and accurate. This improves the confidence in the company’s operations and financial health.
• Compliance with Regulatory Requirements: The Companies Act 2013 and other relevant laws mandate that companies must have their financial statements audited by a qualified auditor. This appointment ensures compliance with legal requirements and corporate governance norms.
• Public Interest Protection: For public companies, the auditor’s appointment protects the interest of general public. By make sure about the accuracy and transparency financial information is available to all potential investors and stakeholders.
• Evaluation of Internal Controls: Auditors assess the effectiveness of a company’s internal controls and financial reporting processes. They provide recommendations for improving internal controls, which help prevent financial irregularities and strengthen the overall governance structure.
• Verification of Compliance: Auditors verify whether the company is complying with applicable laws, regulations, and accounting standards. It helps in to know about the company’s statements provide a true and fair view of its financial position and performance.
• Enhancing Corporate Governance: The appointment of auditors is a crucial aspect of corporate governance. It ensures an independent oversight mechanism over the financial affairs of the company. It also reduced the likelihood of conflicts of interest and make sure about the transparency in decision-making.
• Facilitating Decision-Making: Accurate financial information provided by auditor’s aids management in making informed business decisions. It helps management understand the financial strengths and weaknesses of the company, enabling them to strategize effectively.
• Legal Compliance: Non-compliance with the requirement to appoint an auditor can lead to legal consequences, penalties, and potential disqualification of directors. The appointment is a statutory obligation that companies must fulfil to avoid legal repercussions.

End Notes

Through the above information, we can say that the Auditors are the guardians of transparency in the company. As they play a vital role in upholding the trust of stakeholders and ensuring appropriate financial reporting. By mandating the appointment of qualified, independent, and skilled professionals, the Act reflects the significance of an objective assessment of financial health, interior controls and regulatory standards.