Every company is required to appoint an auditor from the time of incorporation until it ceases operations, according to the Companies Act of 2013 and related rules and laws. An auditor is a qualified individual who audits the financial and operational aspects of a business. An audit is an examination of financial reports by an independent individual or organisation, which includes a balance sheet, income statements, cash flow statements, statement of changes in equity, and notes providing a summary of significant accounting policies and other explanatory notes required to be presented in the company’s annual report.
The primary goal of the audit is to offer a genuine and fair representation of the financial information provided in the annual report, which reflects the financial situation of the organisation for the fiscal year. As a result, every corporation must appoint an auditor. Notably, there are situations when management is dissatisfied with the services of the auditor, that’s when the auditor is removed. Auditors are appointed for a set period of time, which is a maximum of five (5) years in a company for one term. However, the Board of Directors may elect to remove the auditor before the end of his term for any cause.
Who is an auditor
An auditor is a neutral third party tasked with examining and verifying the correctness of financial documents and ensuring that businesses adhere to tax regulations. An auditor analyses the validity and trustworthiness of a company’s financial statements from an accounting standpoint by following the auditing rules specified by the regulatory body. They guard firms against fraud, point out inconsistencies in accounting methods, and, on occasion, operate as consultants, assisting businesses in identifying ways to improve operational efficiency. The auditor provides an unbiased assessment to the company’s owners or shareholders in order to protect and maintain the company’s financial stability.
Auditors operate in a variety of positions in a variety of industries. As the financial year approaches, all government and non-government organisations are required to maintain a track of their accounts and audit reports. Before presenting these companies’ financial statements to the appropriate departments, they must be thoroughly examined and appraised. This audit of financial documents is carried out by an auditor, who shall also be held liable in the event of any inconsistency in the reports. As a result, every organisation needs the services of an auditor.
An auditor is defined as a person who has been trained to review and verify financial data and is recognised as a Chartered Accountant (CA) under the Chartered Accountant Act, 1949. According to the Companies Act of 2013, all corporations must appoint an auditor. Provided, however, that a firm whose majority of partners are eligible for appointment as aforesaid may be appointed as an auditor of a corporation by its firm name.
Term of auditor
In this context, the term refers to the number of years an auditor is selected by the company’s members at its annual general meeting. A corporation can appoint an auditor for a maximum of five (5) years in a single term. The following is in accordance with Section 139(2) of the Companies Act, 2013 and Rule 5 of the Companies (Audit & Auditors) Rules, 2014, where the below mentioned companies are not permitted to appoint an individual auditor for more than one term of five years or an audit firm for more than two terms of five years each as auditor:
- All listed companies,
- All unlisted public companies having paid up share capital of rupees ten crores or more.
- All Private Ltd Co. having paid up share capital of rupees fifty crores or more.
- d. All enterprises with a paid-up share capital of less than the threshold level set forth in (b) and (c), but with public borrowings from financial institutions, banks, or public deposits totalling rupees fifty crores or more.
Individual or firm auditors who have finished their term(s) will not be reappointed for a period of 5 years following the expiration of their term(s). An audit firm that shares common partner(s) with another audit firm whose term in a company has expired is also barred from being appointed in that company for a period of five years. Furthermore, once their maximum term of five (5) years has elapsed, corporations other than those listed above are free to appoint the same auditor for “N” number of periods. The above-mentioned companies must comply with the aforementioned provisions within three years of the date of their implementation.
Removal of auditors appointed under Section 139
Section 140 of the Act allows the auditor to be removed before the end of his term and outlines the procedure for doing so. The auditor appointed under section 139 may be dismissed from his office before the expiration of his term only by a special resolution of the company, after receiving the prior consent of the Central Government in the required way, according to sub-section (1) of Section 140.
An application to the Central Government for the removal of an auditor is to be submitted in Form ADT-2 according to Rule 7(1) of the Companies (Audit and Auditors) Rules, 2014 which must be accompanied by the fees specified in the Companies (Registration Offices and Fees) Rules, 2014. Furthermore, pursuant to Rule 7(2), this application must be submitted within thirty days of the Board’s resolution to the Central Government (powers granted to Regional Director). Furthermore, the corporation must hold the general meeting within 60 days of receiving clearance from the Central Government (regional director) to enact the special resolution, as per Rule 7(3).
A careful examination of subsection (1) of section 140 reveals that the term “auditor appointed under Section 139” means that the auditor(s) appointed by the shareholders, board of directors, or Comptroller and Auditor-General of India can be forced to remove before the end of his term if the company complies with the prerequisites of sub-section (1) of section 140 and Rule 7 of Companies (Audit and Auditors) Rules, 2014.
Note: It is self-evident that sub-section (1) of section 140 of the Act deals solely with the removal of auditors before the end of their term as determined by the board, shareholders, or the Comptroller and Auditor-General of India, as the situation may be, and thus there is no hard rule of special notice by shareholders as prescribed in sub-section (4) of Section 140 of the Act for removal of auditors.
The shareholder, on the other hand, has the right under Section 111 read with Section 100 of the Act to move a resolution for the removal of the auditor. The provisions of Section 140 sub-section (1) must be followed in the event of such an application.
Procedure for removal of auditor
The simple meaning of Section 140 of the Act is that the auditor can be dismissed by passing a special resolution after getting the Central Government’s prior permission (powers delegated to the regional director). As a result, the following procedure must be performed in order to remove the auditor before the end of his term:
- Take approval from the Audit Committee: If a company is required to form an Audit Committee under Section 177, the proposal to dismiss the auditor must be accepted by the Audit Committee at a properly constituted meeting.
- Set up a meeting of the board of directors: Schedule a board meeting for the removal of the auditor on a set date, as per Section 173 and Secretarial Standard-1 (SS-1), in conjunction with the chairman or managing director of the company. At least 7 days prior to the date of the board meeting, send a notice of the board meeting, along with the agenda, notes to the agenda, and draft resolution, to all of the company’s directors at their registered addresses. In the event of an emergency, a shorter notice can be given. Then, in order to provide the concerned auditor with a “reasonable opportunity to be heard”, notify him of the date of the board meeting at which a resolution for his dismissal would be passed.
Pass the board resolution for the removal of the auditor before his term expires at the board of directors meeting. Then give permission to the company’s CS, CFO, or any other director to file an application with Form ADT-2 before the Central Government (powers delegated to the regional director). Then give permission to any practicing CA, CS, or advocate to come before the regional director and sign a Vakalatnama (Memorandum of Appearance). Then, within 15 days after the board meeting’s end, create and circulate draft minutes to all directors for their comments by hand, speed post, or any other means of courier or e-mail.
- Note: According to Regulation 30 and 46(3) of the SEBI (LODR) Regulations, 2015, listed companies should indeed notify the stock exchange of their decision to file an application for removal of the auditor within 24 hours of the board meeting and post the information on the company’s website within two working days.
3. File an application to the Central Government (regional director): In accordance with the provisions of Section 179 of the Act, which concerns board powers, the board of directors of the company has the authority to file an application to the Central Government under sub-section (1) of Section 140. This applies to the regional director for the removal of the Auditor must be filed in Form ADT-2 within 30 days following the board meeting’s resolution, together with the specifics of the reasons for the removal of the auditor.
When the regional director receives the application, he or she will set a date for the hearing. Following the hearing, the regional director may approve the removal of the auditor.
Note: Under Regulation 30 and 46(3) of the SEBI (LODR) Regulations, 2015, listed companies are required to give disclosure regarding the regional director’s order to the stock exchange within 24 hours of the hearing date and post it on the company’s website within two working days.
4. File a certified copy of the order of the regional director with the registrar of companies (ROC): A certified copy of the order of the regional director in Form INC-28 is to be submitted with the ROC by the company, within 30 days of receiving the certified copy of the order.
5. Set up a meeting of the board of directors: Set up a board meeting in accordance with Section 173 and SS-1, and pass the relevant board resolution to take note of the regional director’s directive using the steps outlined in Procedure No. 2 above. Then set the date, time, and location for the company’s general meeting. Then, in accordance with Section 102 of the Companies Act, 2013, approve the draft notice of the general meeting, as well as the explanatory statement affixed to the notice. Then grant the director or company secretary authority to sign and issue a notice of the general meeting, as well as to conduct any other acts or things necessary to carry out the board’s resolution.
6. Set up a general meeting: According to Sections 96, 100, and SS-2, notification of a general meeting must be provided in writing, by hand, by ordinary post, by speed post, or by any type of courier, or even by email, at least 21 days before the actual date of the general meeting. In line with Section 101, notice can be issued with the permission of at least a majority in number and 95% of the paid-up share capital of the company providing the power to vote at such a meeting. All directors, shareholders, secretarial auditors, company auditors, debenture trustees, and others who are entitled to receive notice of the general meeting will get such a notification.
This general meeting must be conducted within 60 days of receiving the Central Government’s clearance, and then a special resolution must be enacted to remove the auditor before his term expires. It’s worth noting that the requirement for shareholder’s approval under the former Section 224A of the Companies Act, 1956 was only for an ordinary resolution, whereas Section 140 of the Act required a company to approve a special resolution of members. The minutes of the general meeting must then be drafted, signed, and collated in conformity with the provisions.
- Note: Listed companies are required to report the outcomes of the general meeting to the stock exchange within 24 hours of the meeting’s conclusion and put them on the company’s website within two working days, according to Regulation 30 and 46(3) of the SEBI (LODR) Regulations, 2015. Listed companies must also provide information of the voting results to the Stock Exchange within two working days after the meeting’s completion and disclose them on the company’s website, according to Regulation 44.
7. File Form MGT-14 with ROC: Finally, within 30 days of approving a special resolution in general meeting, the company must file Form MGT-14 with the ROC, along with the fee stipulated in the Companies (Registration offices and fees) Rules, 2014, and any attachment of documents that may be necessary.
Significance of reasonable opportunity of being heard
The auditor concerned must be given a reasonable opportunity to be heard before any action under Section 140 is taken, according to the proviso to sub-section (1). As a result, the proviso to sub-section (1) of Section 140 requires that the auditor be provided a reasonable opportunity to be heard before any action by the shareholders or the central government is taken to remove him.
According to various dictionary definitions such as Cambridge Dictionary, Merriam Webster, Collins Dictionary, and Oxford Learner’s Dictionary, the term “reasonable” has a very broad magnitude and can differ from one reality of course to another, but it always means an objective, honest, and just conclusion backed by legitimate reasons. As a result, the phrase “reasonable chance to state its or his concerns” refers to the ability to state objections in order to reach a just and equitable resolution.
In Smt. Geeta Patel v. State of Rajasthan & Ors., the Rajasthan High Court construed the word by citing earlier Supreme Court rulings in the case. It was held that the term “reasonable opportunity” had been clarified and viewed by the Supreme Court with reference to clause (2) of Article 311 of the Indian Constitution, which states that a civil servant who may be dismissed, omitted from service, or reduced in rank as a result of an inquiry into allegations of misconduct must be given a reasonable opportunity to be heard.
Furthermore, in Khem Chand v. Union of India & Ors., the Supreme Court summed up the elements of a “reasonable opportunity” under Article 311(2) of the Constitution as an opportunity to refuse his guilt and define his moral superiority, which he can only do if he is told what the charges against him are and the accusations on which they are based; and also as an opportunity to defend himself by questioning the witnesses and himself in his favour.
After considering the terms “reasonable” and “reasonable opportunity” in the context of administrative law, it can be concluded that the doctrine of reasonable opportunity is an objective mode of adjudication of a disputed issue that requires a fair, appropriate, progressive, and satisfactory opportunity for the person effected to present his version of factual information to the authority qualified to decide the issue and further that the responsible authority should assess the affected person’s version without discrimination, prejudice, or extraneous factors, and, if practicable, an opportunity for a personal hearing should be provided.
The Delhi High Court held in Basant Ram & Sons & Anr. v. Union of India & Ors that as stated by the Rule of Law principle that “no one should be condemned without hearing”, an auditor who is being removed from his post must be given a reasonable opportunity to be heard, so that his removal becomes effective. The auditor is granted this opportunity to clean up his domain and furnish the court with his clarifying statements, thus assisting the court in delivering just and equitable justice to all.
The cohesive reflection of the prerequisites of subsection (1) of Section 140 read with Rule 7 would lead to an approach that subjects to the approval of the Central government, a special resolution is required to be passed in the General Meeting of the company for the removal of the auditor before the end of his term and thus removal shall take impact from the date of receiving of approval of the central government. Before any of this may take place, the Auditor who is being removed must be given a “fair opportunity to be heard.” The corporation must also follow any specific observations or orders issued by the central government in connection with the removal of the auditor.
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