Nuances in Interpretation of provisions of rotation of Auditors under the Companies Act, 2013

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Customer Care No. 91-11-45562222
Nuances in Interpretation of provisions of
rotation of Auditors under the Companies Act, 2013
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• Introduction
• It is for the first time, the Companies Act, 2013
  (2013 Act) has brought in the concept of rotation
  of auditors in order to strengthen the role of
  independence of an auditor and to increase the
  credibility of the financial statements of a
  company. The audit of accounts of a company is a
  very important function as the authenticity and
  correctness including true and fair view of the
  accounts are stamped by the Auditors and thus the
  independence of an auditor takes precedence on
  which the very premise of any audit is conducted
  and concluded. It is for this purpose, the
  provisions relating to rotation of auditors was
  included in the Companies Act, 2013. It is not
  uncommon to see with respect to certain
  provisions of the Act, when introduced, faces
  divergent views or becomes a contentious issue.
  The provisions relating to rotation of Auditor is
  no different and contains certain provisions
  which are ambiguous. This article highlights the
  nuances in interpretation of the transitional
  provisions of rotation of auditor, its
  interpretation and an appropriate solution to the
  same.

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• Issue in brief
• Presently, most of the companies are concerned
  about the interpretation of the transitional
  provisions relating to rotation of Auditors, as
  to whether the auditors, who have already been
  the auditors of the company for more than one or
  two terms of five years, as the case may be, are
  required to be changed in the Annual General
  Meeting (AGM) to be held on or before September
  30, 2016 (AGM due date for F.Y.2015-16) or the
  present auditors can be continued for one more
  year, that is, upto AGM to be held on or before
  September 30, 2017 (AGM for F.Y. 2016-17). If we
  analyse and look at the provisions relating to
  rotation of auditors, defintely confusion
  prevails in their appointment due to
  interpretation of transitional provisions.
• Provisions under the Companies Act, 2013 relating
  to appointment of Auditors
• Section 139 of the 2013 Act deals with
  appointment of auditors. Section 139(1), inter
  alia, requires a Company to appoint auditor at
  the first AGM to hold office from the conclusion
  of that AGM till the conclusion of its sixth AGM
  and thereafter, till the conclusion of every
  sixth AGM. Section 139(2) provides for mandatory
  rotation of the auditors in case of all listed
  and other prescribed class of companies. If we
  see the provisions of rotation of auditors, the
  appointment of one term of five consecutive years
  for an individual as auditor or two terms of five
  consecutive years each for a firm as auditor is
  provided. The third proviso to section 139(2)
  provides for a transition period, that is, the
  companies existing on/before the commencement of
  the 2013 Act (2013 Act came into existence w.e.f.
  April 1, 2014), which are required to comply with
  such rotation are required to do so 'within three
  years from the date of commencement of the 2013
  Act."

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• Interpretation of the provisions
• Pursuant to the provisions of Section 139(2), the
  issue that arises is whether the transition
  period for rotation is to be counted from the
  date of commencement of the 2013 Act, i.e. April
  1, 2014, or from the date of conclusion of AGM
  held after the commencement of the Companies Act,
  2013, i.e. the AGM held in 2014 usually on or
  before 30th September, 2014.
• Comments
• If we go through the provisions of the Companies
  Act, 1956 and the procedure followed for
  appointment of the Auditors, it can be seen that
  the appointment of Auditors of a company has
  always been made from one Annual General Meeting
  to next Annual General Meeting. In other words,
  the appointment of auditors was done for a year
  at a time. Now, the same appointment procedure is
  continuing and even under the 2013 Act, the
  procedure is same except that the maximum period
  of appointment of auditor has been capped at
  block of five years at a time. It is also a fact
  that though the Auditors carry out their
  statutory audit for financial year (April to
  March), their appointment has always been done at
  the AGM and the said Auditor continues to be the
  auditor till next AGM and thus the appointment of
  auditor in no way related to any particular year
  or financial year. This intention of the
  Legislature was also enunciated in the
  clarification issued by the Department of Company
  Affairs in the context of appointment of auditors
  under the Companies Act, 1956. Also, in the event
  if audit for more than one financial year is to
  be completed between two AGMs, then also, the
  appointment of auditor would take place at the
  AGM and the Auditor would complete the audit
  relating to both the financial years which were
  then pending for completion till the next AGM and
  the appointment of auditor was never related to
  the financial year as such. But it is different
  under the 2013 Act, as the provision for
  appointment of auditor is for a block of five
  years.

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