Change of Auditor
In order to stay in line with regulations, a company needs to select a statutory auditor within 30 days of being established. An auditor could serve for a period ranging from one to five years. In certain situations, a company may have to replace its auditor. In this article, we outline the process of replacing or removing a company's statutory auditor.
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What’s an Auditor?
Auditors are experts in finance who conduct audits by evaluating financial statements, internal procedures, and transaction documents to determine their accuracy and completeness. The primary categories of auditors are internal and external. Internal auditors typically are employed by the organization they audit and provide advice to management regarding enhancing recording and reporting procedures. However, external auditors are employed by accounting firms to conduct audits on companies other than their own.
Change of Auditor
Auditor of a Company
- The company must rotate or change auditors every 5 years in order to comply with the Companies Act, 2013. In these instances, it is important to explicitly mention that a retiring auditor cannot be reappointed during an Annual General Meeting where a resolution is passed to appoint a new auditor. According to the specific notification, the Auditor has the option to submit a written representation to the company, either accepting or disputing the change, depending on the circumstances.
- An auditor hired by a company is an impartial external expert responsible for evaluating and confirming the company's financial status and must approve the company's financial documents. An auditor is tasked with assessing the accuracy and trustworthiness of the financial statements of a company or organization. The most essential task of the company is carried out by the auditors. Therefore, choosing and hiring an auditor is a crucial responsibility for the board of directors.
- Choosing the correct audit company is a significant decision. Advising the board on selecting an external auditor is a crucial responsibility of the audit committee when one is present. Nevertheless, the selection of auditors holds significance for shareholders because auditors directly communicate with them, and therefore, the decision to appoint or reappoint auditors must be approved by shareholders in a meeting.
Role of Auditor
- The auditor must create an audit report using the company's financial statements. He must ensure that the accounting books he examines are kept in compliance with the appropriate legislation. He needs to make sure that the financial statements adhere to the Companies Act 2013, relevant Accounting Standards, and other applicable regulations.
- If the auditor assigned is specifically for the branch and not for the entire company, they will provide help in finishing the branch audit. He will create a report using the branch's accounts that he has reviewed, and then forward it to the company auditor. The auditor of the company will then add this report to the company's main audit report.
- The auditor might have specific concerns about possible fraud occurring in the company, instances where the financial statements and numbers provided don't seem to match up. If he ever encounters such scenarios, he must promptly inform the Central Government as outlined in the Act.
- As a professional, the auditor must follow both the Code of Ethics and the Code of Professional Conduct. This includes the need to maintain confidentiality and exercise caution while performing his responsibilities. Professional scepticism is another crucial requirement.
Removal of Auditor
- A special resolution and approval from the Central Government are required in order to dismiss an auditor before the completion of their term. Within a month of the Board Resolution being approved, Form ADT-2 seeks approval from the Central Government to dismiss auditors. The company needs to organize an Extraordinary General Meeting (EGM) within 60 days after obtaining approval from the central government to implement a special resolution. The provision specifies that the auditor must have an equal opportunity to address the meeting.
- MGT-14
- ADT-2
- RD-1
- These are the forms required for the removal of a auditor
- As per Section 139, the Company can choose a new auditor if the current one has been serving for either five or ten years without interruption. In these cases, a Notice must be given to the AGM so that the Resolution for an appointment can be reviewed. The Notice should clearly specify that the current auditor cannot be re-appointed and should mention a new auditor. The organization is also required to give the leaving auditor a copy of the notification. Auditors who are retiring can create a presentation. If the auditor who is leaving writes a statement and asks the company to inform the company's members, the notice to the members must explicitly state that the auditor has made a statement.
- Every individual who is entitled to get the meeting invitation will be given a duplicate of the presentation that has been prepared. If the necessary documents cannot be sent, the auditor's statement may be presented during the meeting. In situations where the representation is not sent as instructed, a copy must be submitted to the ROC.
Appointment of Auditor
- The company's first auditor is appointed by the directors. They remain in office until the conclusion of the initial shareholder meeting where the accounts are presented to the members. During that meeting, the shareholders have the option to either re-appoint the current auditor or select a new one to serve until the next shareholders' meeting where accounts are presented.
- Private companies have the option to decide not to present accounts to the members at a general meeting by passing an 'elective resolution'. In case of completion, the auditor must be re-elected or a new one chosen at a subsequent meeting of the company's members within 28 days of the accounts distribution.
- Private firms can also choose to pass a resolution that exempts them from having to appoint an auditor annually. If that occurs, the current auditor continues to serve without any additional process until a decision is made to renew annual appointment or to dismiss them as auditor. The detailed process includes step-by-step explanations along with copies of all meeting minutes and notices in our documentation packet for the auditor appointment.
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FAQs
What are the Rules for Changing of Auditor?
During their term of office, the company's members have the authority to dismiss an auditor or choose not to re-appoint them for another term. The company must be given a 28-day notice if they plan to propose changes to the auditor or appoint a new one during a general meeting.
What are the reasons for Change of Auditor?
The shift in auditors is due to internal policies, introducing new skills, meeting compliance requirements, expertise, and quality needs.
What forms are required for Change of Auditor?
In order to oust an auditor before the completion of his term, both a special resolution and approval from the Central Government are required. Within a month of the Board Resolution being approved, Form ADT-2 seeks approval from the Central Government for the removal of auditors. Also, MGT-14 & RD-1.
Why to Change Auditor in every 5 years?
Initial audits have a greater rate of failure compared to audits conducted in later years. This signifies that every five years, auditors will conduct additional audits that are inaccurate. New auditors will need time to adjust during their first year, which could result in a less effective audit.
Can we Change the Auditor in AGM?
In accordance with Section 140 of the Companies Act, 2013, an auditor can only be dismissed before the end of their term through the approval of a special resolution at a general meeting and with the Central Government's prior consent.