Rotation of Auditors
Under Secction 139(2)
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The section
139(2) of the Companies Act, 2013 has introduced the system of rotation of
auditors which is applicable to –
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 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:-
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;
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;
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.
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.
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:
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.
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:
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.
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.
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.
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.
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.
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 ).
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.
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.
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.
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)]
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).
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).
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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