Allegedly, several stakeholders are involved in the discharge of auditor duties. One view is that the central government seeks to be involved due to the great significance of auditor independence within the general public interest. The Companies Act’s applicability to the auditor’s removal rests on the guiding principle that removal should not be arbitrary; the existing law will assist in guaranteeing this. Hence, auditor independence and professional integrity are safeguarded through the establishment by law of a process for the removal of auditor.
Congress passed the Companies Act 2013 to provide an adequate framework for audit practices in India. For any removal, an auditor must pass an extraordinary resolution, and information must be forwarded to the Central Government, giving therein the reasons for the removal, the specific nature of the problem with proof, if any, and providing a chance to the auditor to defend.
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.
Appointment and Removal of Auditor
Auditors can be internal auditors 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.
Removal of Auditor Procedure
Removal of auditor procedure puts forward a defined procedure for removal by company directors while at the same time removing that auditor from their duties under the Companies Act of 2013. Removal should never be politically motivated, for the mere fact that shareholders in central Government do, in theory, have that power. Companies should proceed with their legal requirements and avoid any risk associated with removing an auditor that could imperil his professional independence.
- Board Meeting: The Board of Directors, or a body of the company, shall meet formally or informally to discuss and pass a valid resolution for the removal of the auditor.
- Communication to the Central Government: If the removal affects the auditor’s remaining time in office, it shall notify the central government in a prescribed format ADT-1.
- General Meeting: On passing approval from the Central Government, the company shall hold an extraordinary general meeting within 60 days of such approval to pass a special resolution.
- Notice to Auditor: The auditor should be given prior notice of the proposal to be discussed in the EGM and allowed to present his case to the company members.
- Form MGT-7 to be Filed with the Registrar of Companies: After the special resolution is passed, this form should be filed with the Registrar of Companies.
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.
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.
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.
Removal of Auditor FAQs
1. What are the legal requirements for the removal of auditor?
The Companies Act, 2013, provides the removal of auditor procedure whereby companies must pass a special resolution in a general meeting and receive prior approval from the central government.
2. Can a company remove an auditor without approval?
No. The removal of auditor procedure includes obtaining government approval, passing a special resolution, etc.
3. What is the role of the central government in the removal of company auditor?
To ensure companies cannot easily remove auditors who might expose financial irregularities.
4. What happens if a company does not follow the removal of the auditor companies act 2013?
If a company fails to comply with legal requirements, it may be subject to penalties, civil actions, and reputational harm.
5. What are the alternatives to removing an auditor?
Instead of removal, the company may approach the auditor to resign. Alternatively, it could appoint a second auditor to oversee this auditor, terminate this auditor’s appointment prematurely, and appoint another auditor for the uncompleted amount of time.
