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

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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. – PowerPoint PPT presentation

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


1
Customer Care No. 91-11-45562222
Nuances in Interpretation of provisions of
rotation of Auditors under the Companies Act, 2013
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2
  • 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.

Customer Care No. 91-11-45562222
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3
  • 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."


Customer Care No. 91-11-45562222
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4
  • 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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