Company Law-All About Auditors (Appointment, Removal, Power, Duties and Liabilities)
Introduction
- Qualification of Auditors.
- Appointment of Auditors
- Removal of Auditors
- Power and Duties of Auditors
- Liabilities of Auditors
Qualification/Disqualification of Auditors
Section 141 of the Companies Act provides the eligibility, qualification and disqualification of Auditors.
Who can be appointed ?
Only Chartered Accountant is eligible for Company Auditor.
Any firm(LLP) which have majority of their partners as CA's can also be appointed as auditors.
Who cannot be appointed as Auditors ?
Section 143 lays down some disqualification. They are as below
- a body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008;
- an officer or employee of the company;
- a person who is a partner, or who is in the employment, of an officer or employee of the company;
- a person who, or his relative or partner(Financial relationship in some or other way)—
- is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company:
- is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of such amount as may be prescribed; or
- has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, for such amount as may be prescribed;
- a person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed;
- a person whose relative is a director or is in the employment of the company as a director or key managerial personnel;
- a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies
- 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, directly or indirectly, renders any service referred to in section 144 to the company or its holding company or its subsidiary company.
Summary of all above point is the auditor is going to be appointed should not have some kind of financial relationship, or should not be interested in Company. (Apart from interest in Auditing.. :))
Last point, the if person is rendering certain services as per Section 144 is also not eligible. What are those services in Section 144 ? They are as below
- accounting and book keeping services;
- internal audit;
- design and implementation of any financial information system;
- actuarial services;
- investment advisory services;
- investment banking services
- rendering of outsourced financial services;
- management services; and
- any other kind of services as may be prescribed:
Appointment of Auditors
Non-Government Companies
Generally, Board of Directors will appoint an auditors in first 30 days of registration of the Company.
If Board fails to appoint, then members will appoint the auditors in extra ordinary general meeting.
Tenure for the appointment is 5 years.
Auditors (Individuals or Firms) have to give consent to such appoint. Also they have to state that they satisfy all criteria for appointment. (They have passed CA exam etc)
Notice of such appointment has to be filed with Registrar of Companies within 15 days.
There are two restrictions related to appointment.
- Individual can be appointed for one term (5 years max)
- Firm can be appointed for two consecutive terms (10 year total, with each term of 5 year)
During appointment, it can be decided by the members that partners in auditing firm may be rotated.
Government Companies
In government Board should appoint Auditors in 30 days.
If Board fails, then CAG (Comptroller and Auditor General) should appoint Auditors in 60 days. If they fails then they should inform the members.
Then members should appoint the Auditors in 30 days.
Auditors Vacancy (Casual Vacancy, Section 139(8))
For non government company- Casual vacancy should be filled by Board of Directors within 30 days. If casual vacancy is due to resignation of Auditor, then Board of Directors should hold a general meeting within 3 months and appoint an auditor.
For Government Companies, CAG should fill the post within 30 days.
Re-appointment
Subject to restrictions about tenure that we have discussed earlier, Auditors can be reappointed if below conditions are fulfilled with
- He is not disqualified for re-appointment
- He has not given the company a notice in writing of his unwillingness to be re-appointed
- A special resolution has not been passed at that meeting appointing
Removal of Auditors
Company can remove the auditors before tenure
First they had to take the permission from Central Government. Then they had to pass a special resolution to that effect. Also before removal Auditors should be given to present his side of story.
Tribunal is also empowered to remove the auditors.
When Central government or any other person makes an application to tribunal, and tribunal thinks that Auditor is doing some kind of fraud, they Tribunal can direct the company for removal of auditors.
When Auditor is removed on order of Tribunal for fraud, he will not be eligible for next 5 years.
Powers and Duties of Auditors
Right to Access Information
Auditors may seek information about books of accounts, voucher, reports etc from officers of the company. He can seek additional information from officers of the company.
Section 143(1) list down matters on which auditors may seek information.
- Proper security for loan and advances
- Transaction by book entries
- Sale of assets in securities in loss
- Loan and advances made shown as deposits,
- Personal expenses charged to revenue account
- Case received for share allotted for cash
Prepare a financial Report
Auditor has to prepare a financial report. The report should be in accordance with accounting and auditing standards required by the Act. The report should state below things
- whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements;
- whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him;
- whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company’s auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report;
- whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns;
- whether, in his opinion, the financial statements comply with the accounting standards;
- the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;
- whether any director is disqualified from being appointed as a director under sub-section (2) of section 164;
- any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;
- (i) whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls;
- such other matters as may be prescribed.
Prepare a Branch report.
Auditor has to prepare a branch report and has to send it to Head office. If Branch is in separate country, then such report should adhere to accounting and auditing standards of such a company.
Report a fraud to .
A Auditor has to report a fraud to Central Government if detected. This is crucial duty. There is liability if Auditor breach this duty.
Right to attend meetings.
All the notices about general meetings should be sent to Auditor as he has a right to attend all the meetings. Company can exempt the Auditors from attending a meeting. But if not, then he can attend all the meetings.
Duty to Sign audit reports.
Auditors has to sign all the auditing reports that he prepares. All the observations, qualifications as well as comments of the auditor on the financial transactions or matters which have adverse effect on the functioning of the company and which have been mentioned by the auditor in his report have to be read before the company in general meeting and will be open to inspection by any member of the company
Liabilities of Auditors
1) Auditors can be held liable for Negligence. He is like an agent of shareholders. Auditors play crucial role in transparency and hence he has to play his role diligently. In the case of ICAI Vs S.K Jain, court held auditors guilty for gross negligence.
2) Auditors can be held liable for misfeasance.Misfeasance is a breach of duty or breach of trust.If the auditor does something wrongfully in the performance of his duties or he does not perform his duties properly in the first place resulting in a financial loss to the company, he may be held liable for misfeasance
3) If Auditors contravenes provision of 139/141 (About his qualifications, notice of resignation) etc, then he can be fined up to 25000 to 100000. If Auditors contravenes such provision willfully then there is harsher fine of 100000 Rs to 2500000 Rs.
4) If Auditors detects a fraud and conceal it, then he is liable for fine up to 100000 to 2500000 Rs.
5) If Auditors is involved in any fraud as per Section 447, then he is liable for imprisonment from 6 months to 10 years. Also money involved in fraud may be recovered from him.
6) 100 or members, or shareholders owing more than 10% may go for class action suite against Auditors for fraudulent act.
Conclusion
Here is one famous auditor. A CAG.
He audited government accounts when Congress government was in power. Then he claimed that government did 2G scam, Coal Scam, X Scam, Y Scam, Z Scam. This led to fall of government. But..but none of the scam prepared by this man was proved in a Court. NONE.
He was later appointed to various posts by subsequent government even after retirement. Point here is Auditor is powerful, and so are the auditors of Private companies. (However such power should not be used for unethical ends).
Auditors can help immensely in improving the corporate governance.
Well that's all about Auditors.
Business Law Bare Act
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