Company Auditor’s Qualifications, Disqualification & Appointment

Body corporate u/s 2(11) includes a company as per the Companies Act, 2013 and a foreign company which is incorporated outside India.

As you know a Limited company has “limited liability” & Separate legal entity – The members of the company are responsible only to the extent of unpaid capital (if any). In case of any issue – We cannot make members personally responsible.

In case of LLP, at least one partner will have unlimited liability; hence it is allowed to be auditor.

(b) an officer or employee of the company;

Explanation

As per Section 2(59), ‘Officer’ includes

• • • Any director;
    • Manager;
    • Key managerial personnel (KMP); or
    • Any person in accordance with whose directions or instructions the BOD or any one or more of the directors is or are accustomed to act.

As per Section 2(51), ‘Key Managerial Personnel’, in relation to a company, means:

• • • the chief executive officer (CEO) or the managing director or the manager;
    • the company secretary;
    • the whole-time director;
    • the chief financial officer (CFO); and
    • such other officer as may be prescribed. Like Chief Operating Officer (COO), etc.

Reason

An officer or employee – cannot be independent – If those are appointed as auditors of the company, they cannot express independent opinion on the financial statements.

    (c) a person who is a partner, or who is in the employment (employee), of an officer or employee of the company;

Explanation

In this case, two relations are possible i.e.,

Reason

These people have indirect relationship; hence they are not independent and cannot be appointed as auditor.

Clause (d) has three sub-clauses

(d) a person who, or his relative or partner

(i) is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company;

(ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of ` 5 Lacs; OR

(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of ` 1 Lac;

Who is relative as per the Companies Act, 2013?

As per section 2(77) & Rules

“Relative” includes

• • • Members of Hindu Undivided family;
    • Step father, Step mother, Step brother, Step sister & Step son (except Step daughter).

This sub-section should be read with the rules (Follow instructions for better understanding).

First read the above sub-section (3) clause (i);

It says Auditor (himself) or his Relative or Partner should NOT hold

There is an exception to the above point- As per Rule 10 of the Company (Audit and Auditors) Rules, 2014,

• • • The relative may hold security or interest in the company of FACE VALUE ≤ ` 1,00,000; (Remember this exception is applicable only to relative but NOT to the auditor & Partner and also, this exception is not applicable if a relative holds security in any other group company such as H Co./S Co./A Co. Fellow S Co.)
    • If the relative acquires any security or interest greater than ` 1,00,000 face value – Corrective action can be taken by the auditor within 60 days of such acquisition or interest.

What do you mean by Security as per the Securities Contracts (Regulation) Act, 1956?

The word “Securities” include – All Shares, scrips, bonds, debentures, stock, derivatives etc.

I hope you understood, clause (i); Let us get into clause (ii)

(ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of ` 5 Lacs; OR

(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of ` 1 Lac.

I hope you understood the clause. Let us get into clause (e) of sub-section (3) of section 141- It says

(e) a person (auditor) or a firm who, whether directly or indirectly (through agent/relation), has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company;

It says – Auditor or Firm should not have business relationship with the group either directly or indirectly.

‘Business relationship’ shall be understood as any transaction entered into for a commercial purpose, except (means the following are not treated as business relationship)

(i) commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm under the Act and the Chartered Accountants Act, 1949 and the rules or the regulations made under those Acts;

(ii) commercial transactions which are in the ordinary course of business of the company at arm’s length price – like sale of products or services to the auditor, as customer, in the ordinary course of business, by companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses.

Just think,

Mr. A is a chartered accountant in practice – His wife (relative) is a director in ABC Ltd. and she has ` 50,000 face value equity shares in the company.

Can Mr. A be appointed as auditor for ABC Ltd.?

Answer is YES – as per so far clauses discussed. BUT your answer will be “NO” after reading the below clause.

(f) A person

(In simple words – a person whose relative is a director or key managerial person of the company is disqualified)

(g) This clause has two points

Point (i) – A person who is in full time employment elsewhere;

Explanation – When a member is in full time employment – he cannot be in practice as per CA Act, 1949. If a person is not in practice – he is not eligible to be appointed as an auditor of a company.

OR

Point (ii) – A person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than 20 companies;

It means company cannot appoint a person as auditor if he is already auditor for 20 companies. It further means – one member cannot be auditor for more than 20 companies simultaneously.

I would like to discuss this point in detail at later part of this chapter. So just go ahead.

(h) A person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.

(i) A person who directly or indirectly rendered any service referred to in section 144 to the company, its holding or its subsidiary.

(Section 144 deals with prohibited services by auditor – we will discuss this at later part of this chapter).

Your sub-section (3) of section 141 is completed.

Section 141(4) – Says

If a person appointed as an auditor of a company incurs any of the disqualifications specified in Section 141(3), he shall be deemed to have vacated his office. Such vacation shall be deemed to be a casual vacancy in the office of the auditor.

It means – he must not attract disqualifications u/s 141(3) throughout the tenure of his office. At any time, if he does attract ANY disqualification, it is deemed that NO auditor exists in office. Auditor shall vacate the office immediately and no one need to serve any notice to auditor.