Item: Rotation of Auditors Under Secction 139(2)
Author: Muhammed Fasil K

Rotation of Auditors Under Secction 139(2)

The section 139(2) of the Companies Act, 2013 has introduced the system of rotation of auditors which is applicable to –

(I) listed companies; or

(ii) all companies belonging to such class or classes of companies as prescribed under Rule 5 of the Companies (Aufit and Auditors) Rules 2014.

Class of companies covered in rotation scheme:

According to Rule 5 of the Companies (Audit and Auditors) Rules, 2014 and for the purposes of sub-section (2) of section 139, the class of companies shall mean the following classes of companies excluding one person companies and small companies:-

(a) all unlisted public companies having paid up share capital of rupees 10 crore or more;

(b) all private limited companies having paid up share capital of rupees 20 crore or more;

(c) all companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of rupees 50 crore or more.

The concept of rotation of auditors shall not apply to one person companies and small companies.

The provisions for rotation of auditors under sub sections 2, 3 and 4 of section 139 are given below:

In case of an individual as auditor:

(a) No individual shall be appointed or re-appointed as auditor for more than 1 term of 5 consecutive years.

(b) An individual auditor, who has completed his term of 5 consecutive years, shall not be eligible for re- appointment as auditor in the same company for 5 years from the date of completion.

In case of a firm as an auditor:

(a) No audit firm shall be appointed or re-appointed as auditor for more than 2 terms of 5 consecutive years.

(b) An audit firm which has completed its 2 terms of 5 consecutive years, shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of such terms.

(c) If any firm/LLP which has one or more partners who are also partners in the outgoing audit firm/LLP cannot be appointed as auditors during the 5 year period. In other words, if two or more audit firms have common partner(s), and one of these firms has completed its 2 terms of 5 consecutive years, none of such audit firms shall be eligible for re-appointment as auditor in the same company for 5 years.

The aforementioned provisions can be explained by the following examples.

Example 1: Mr. X has completed 5 years in M/s ABC Ltd. in FY 2016-17. Now, he is not eligible for re-appointment for next 5 years in M/s ABC Ltd.

Example 2: Firm XYZ has completed 10 years in M/s ABC Ltd. Now, he is not eligible for re-appointment for next 5 years M/s ABC Ltd.

Example 3: If Mr. X is a common partner in firm XYZ and Firm VWX, then Firm VWX is also not eligible for appointment as auditor in M/s ABC Ltd for that 5 years (i.e. from 2017-18 ).

Transition Period

There is a transition period of three years, from date of enactment of the 2013 Act, to comply with this requirement. All listed companies or specified companies will have to comply with the above provisions relating to rotation of auditors within 3 years from the date of commencement of this Act i.e. within 31st March 2017. The aforementioned provisions can be explained by the following illustration in a better manner.

If ABC & Co. is auditor of M/S XYZ Ltd. and the balance sheet of M/S XYZ Ltd. is being signed by Mr. A who is also a partner in other firm PQR & Co. If the original tenure of appointment of ABC & Co. is expiring on 20th August, 2020. The firm PQR & Co. can’t take the appointment of auditor of M/S XYZ Ltd. for the period of five years starting from 21st August, 2020 and up to 20th August, 2025.

In the above example, PQR & Co. can take the advantage of being appointed as auditor on a date starting after the expiry of financial year 2020-2021. In simple words, PQR & Co. is being eligible for appointment of auditor of M/S XYZ Ltd. after the start of new financial year from the expiry of original tenure of ABC & Co., as the proviso mentions only of one preceding financial year.

Right of removal or resignation not affected [4th proviso to Section 139(2)]

1. The right of the company to remove an auditor before expiry of one or two term(s) of 5 consecutive years shall not be affected due to any provision contained in section 139(2).

2. The right of auditor to resign from the office of auditor before expiry of one or two term (s) of 5 consecutive years shall not be affected due to any provision contained in section 139(2).

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Rotation of Auditors Under Secction 139(2)