This article is about the concept of “Rotation Of Auditor” as per Companies Act 2013.
Section 139(2) provides that listed companies and other prescribed class or classes of companies (except one person companies and small companies) shall not appoint or re-appoint :
1) An individual as auditor for more than one term of five consecutive years, and
2) An audit firm as auditor for more than two terms of five consecutive years.
(For the purpose of section 139(2) a year means period from AGM to next AGM.)
As per the Companies(Audit and Auditors) Rules 2014, following are the prescribed classes of Companies for the purpose of section 139(2):
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 50 crore or more
c) All companies having paid up share capital lesser than the limit mentioned in (a) and (b) above, but having public borrowings from financial institutions ,banks or public deposits of Rupees 50 crores or more.
For the better understanding of (c) consider the example below-
Haridas Ltd is a private limited company,having paid up share capital of Rs.16 Crores but having public borrowing from nationalized banks and financial institutions of Rs.65 Crore.
In the above example the share capital of Haridas Ltd is below the threshold limit (Rs.50 Crore for private limited companies) but its borrowing from national banks and financial institutions is of Rs.65 Crore that is more than the threshold limit of Rs.50 Crore.
Hence the manner of rotation of auditor will be applicable on Haridas Ltd.
Rotation Of Auditor:
When term of Auditor as per section 139(2) is expired then such Auditor is to be rotated because such Auditor shall not be eligible for re-appointment after expiry of such term.
One important thing that should be kept in mind is that rotation of auditor cannot be considered as removal of auditor after expiry of his term under section 140(4) of the Act.
Section 140(4) will not be applicable on Rotation of Auditor. Rotation will be automatically but Section 139(1) will be followed by to appoint another Auditor of the company.
Cooling Period:
Cooling period refers to the term for which the rotated auditor shall not be eligible for re-appointment as auditor in the same company.
The cooling period for Auditor is as follows:
1) An individual auditor who has completed his term (i.e. one term of five consecutive years) shall not be eligible for re-appointment as auditor in the same company for five years from the completion of his term,
2) An audit firm which has completed its term (i.e. two terms of five consecutive years) shall not be eligible for re-appointment as auditor in the same company for five years from the completion of such term,
Further, as on the date of appointment no audit firm having a common partner or partners to the other audit firm ,whose tenure has expired in a company immediately preceding the financial year ,shall be appointed as auditor of the same company for a period of five years.
In simple terms it can be understood as, if at the time of appointment there is any common partner in rotated auditor and proposed new auditor then such proposed new auditor shall not be eligible for appointment for 5 consecutive years.
Also, if the partner in charge of rotated firm resigns from the firm and joins another firm as partner then such other firm shall not be eligible for appointment for 5 consecutive years.
If rotated auditor and proposed new auditor are associated in same network of audit firms then proposed new auditor shall not be eligible for appointment of 5 consecutive years. (Same network of audit firm means firm operating or functioning under the same brand name ,tarde name and common control.)
BREAK IN SERVICE PERIOD OF AUDITOR
• If break period is less than 5 years
Old service period before break will not be lapsed and it will be considered as continuous basis for determining term of auditor at the time of appointment after break(i.e. after break only remaining term will be provided to auditor)
• If break period is 5 years or more
Old service period before break will be lapsed and a fresh term will be allowed to Auditor at the time of appointment after such break.
Although under Section 139(2), term of auditor is fixed but company still have a right to remove it’s auditor before expiry of such term and Auditor still have a right to resign from auditing engagement.
ABOUT THE AUTHOR
Commerce Graduate & Aspiring Chartered Accountancy.
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