The members of a company may remove an auditor from office at any time during their term of office or decide not to re-appoint them for a further term. They must give the company 28 days’ notice of their intention to put a resolution to remove the auditor or to appoint somebody else, to a general meeting. Appointment and removal of auditor are essential processes in corporate governance. All corporations must appoint auditors to check their financial records and see the transparency. The appointment of auditors involves legal formalities subject to conditions when removing them. The appointment and removal of a company auditor have been regulated by laws, including the Companies Act 2013, which concerns auditors’ independent and fair actions.
Auditor Meaning
An auditor is a professional who examines the financial records of a firm to ascertain their correctness, compliance, and transparency. An auditor should give an unbiased opinion on the company’s financial statements. The object of the exercise is, thus, to detect errors, frau,d and mismanagement in financial reporting.
Auditors play a significant role in corporate governance by checking a company’s compliance with generally accepted accounting standards and tax regulations. The auditor ensures that the financial data presented to stakeholders is accurate and truthful.
Appointment and Removal of Auditor
Auditors can be classified based on their internal auditor and external auditors. Internal auditors are usually company employees and focus on improving internal processes. External auditors will be independent professionals who will conduct audits as legally required. The appointment and removal of auditors follow specific legal provisions to maintain the integrity of financial audits.
Auditors perform some crucial functions toward a company’s financial health. Their responsibility does not end with the verification of financial statements. They look into controls on finances, fraud detection, and regulation compliance.
Every company must appoint an auditor to review its financial statements and verify its compliance with laws. The Companies Act 2013 sets out rules on appointing and removing auditors.
Appointment of Auditor Under the Companies Act, 2013
The appointment of the auditor will differ depending on the type of company. The Board of Directors and Shareholders appoint the first auditor as subsequent auditors. The shareholder will approve removal of the auditor, who will follow the relevant law provisions.
The company appoints an auditor to make sure that there is an accurate and fair view in the finances of the firm. Sections 139 to 148 under the provisions of the Companies Act 2013 govern the qualification, appointment, remuneration, and removal of auditors.
Section 139: Appointment of Auditor
- Every company shall appoint an auditor at its first annual general meeting.
- The appointment is made for five years, subject to ratification by members at every AGMs.
- Rotation of auditors is for listed companies or certain specified classes of companies after two terms of five years each.
Section 140: Removal and Resignation of Auditor
- A special resolution in a general meeting can remove an auditor before the expiry of the term.
- The removal requires prior approval from the central government.
- An auditor resigns, they can file a statement of resignation to the company and the Registrar of Companies (ROC).
Section 141: Eligibility and Qualification of Auditors
- Only a Chartered Accountant or firm with all the partners as Chartered Accountants is eligible for appointment as auditor.
- Persons having business interests in the company cannot be auditors.
Section 142: Auditor’s Remuneration
- The shareholders fix the remuneration of auditors in the general meeting.
- If appointed, the Board may determine the remuneration for the first auditor.
Removal of Auditor Under Companies Act, 2013
A company can remove an auditor even before the completion of the term, provided certain conditions are fulfilled. The appointment and removal of the company auditor follow the stipulated law, keeping fairness intact.
Section 140(1): Removal Before Term Completion
- A special resolution has to be passed by the shareholders.
- Prior approval of the Central Government in this regard is necessary for that company.
- The auditor must be given a reasonable opportunity to present their case.
Section 140(2): Resignation of Auditor
- The auditor must file a resignation statement with the company and ROC.
- The resignation must mention reasons and other relevant facts.
Process for Removal of Auditor
The company states the valid reasons for removal in an application to the Central Government. The Central Government reviews the application for approval.
- The company must call a general meeting where a special resolution for removal is passed. A new auditor is appointed following the legal process.
- Removal of an auditor without proper justification may lead to legal complexities. Therefore, the companies must follow all regulations under the Appointment and Removal of Auditor Companies Act 2013 without disputes.
Duties and Responsibilities of Auditor
The auditor’s responsibilities cover matters beyond checking annual accounts, including verifying internal financial controls, detecting fraud, and compliance with legal obligations. The company must follow the legal provisions while appointing or removing an auditor to avoid legal liability.
- To verify financial statements for accuracy and fairness
- Assurance of accounting standards and tax compliance
- Identification of financial misstatement and fraud potential
- Advice on the improvement of internal control
- Independent audit report delivery to stakeholders.
- An auditor has a significant role in corporate governance by earning the trust of the eyes of investors, shareholders, and regulatory authorities.
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Is an Auditor Concerned Only With Annual Accounts?
An auditor is not confined to the review of annual accounts only. Their works are far beyond the verification of financial statements. Conducting internal and operational audits. Risk management strategy reviews. Company financial compliance advice. Financial and business fraud prevention and detection. Auditors provide continuous support throughout the financial year and ensure financial integrity in every aspect of a company’s operations.
What Should a Company Do with the Audited Accounts?
After completing the audit, take the necessary steps for the company to ensure compliance and transparency. Submission of audited financial statements before regulatory authorities. Presentation of audit reports to shareholders in the annual general meeting. Availability of economic data to stakeholders. Implementation of recommendations made by auditors for improving financial controls. It uses the audit report for strategic financial decisions and for sustaining financial stability in the long term.
Appointment and Removal of Auditor FAQs
1. What is the procedure for the appointment and removal of auditor?
The company does appoint an auditor through either board or shareholder approval. Removal requires shareholder approval and permission from the Central Government. The appointment and removal of the Auditor Companies Act 2013 applies to this process.
2. What are the qualifications required for an auditor?
A Chartered Accountant must be an auditor. An audit firm may also be appointed if all partners are Chartered Accountants. Qualification, appointment, remuneration and removal of auditor have been comprehensively handled in legal standards.
3. Can a company change its auditor before the audit period has fully expired?
Yes, but it requires the approval of shareholders and the consent of the Central Government. The companies must give valid reasons for removal and follow legal procedures.
4. Is the appointment of an auditor mandatory for all companies?
Yes, the appointment of an auditor is mandatory for every company under legal requirements. Auditors ensure financial compliance and transparency.
5. What would happen in case a company fails to appoint an auditor?
The failure to appoint an auditor can result in penalties prescribed under the law. Regulatory authorities can take the necessary action against the company for such non-compliance.
