Auditors: Appointment, Rotation, Resignation, Removal and Disqualification

In one line

An auditor is appointed for five years at a time, cannot be removed before his term ends without a special resolution and the Central Government's approval, and is disqualified if he has almost any financial or personal connection with the company.

In exam wording: section 139(1) requires every company to appoint an auditor at its first annual general meeting to hold office till the conclusion of the sixth annual general meeting; section 139(2) imposes rotation on listed and prescribed companies; section 140(1) allows removal before the term only by special resolution with the previous approval of the Central Government; and section 141(3) lists nine disqualifications.

Why the law has this at all

The auditor is appointed by the members but paid by the company and works with the management every day. That is a structural conflict, and the Act attacks it from four directions.

Security of tenure. An auditor who can be dismissed at will is an auditor who will not qualify a report. So he is appointed for five years and can be removed early only with a special resolution and the Central Government's approval, after being heard.

But not too much security. An auditor who audits the same company for thirty years stops being an outsider. So section 139(2) forces rotation on listed and prescribed companies, with a cooling off period.

Independence by disqualification. Section 141(3) removes anybody with a financial interest, a business relationship, a relative inside the company, or too many audits already.

And a voice on the way out. Sections 140(2) and 140(4) make sure that an auditor who resigns must say why, and that one who is being replaced can have his representation circulated to the members.

Some words this chapter uses

A casual vacancy is a vacancy arising otherwise than by expiry of the term. Rotation means compulsory change of auditor after a fixed period. Special notice is the members' advance notice under section 115. A relative is defined in section 2(77). A business relationship is of such nature as may be prescribed. The Comptroller and Auditor-General appoints auditors for Government companies.

Appointment: section 139(1)

Every company shall, at the first annual general meeting, appoint an individual or a firm as auditor, who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting, and thereafter till the conclusion of every sixth meeting, the manner and procedure of selection being as prescribed.

So the term is five years, expressed as first meeting to sixth meeting.

The first proviso was omitted with effect from 7 May 2018. It had required the appointment to be ratified by the members at every annual general meeting. It is no longer necessary, and stating otherwise is an error of live law.