ROTATION OF AUDITOR

so auditor independence is the main goal of rotation of auditor        ,

• Applicability of Section 139(2) Rotation of Auditor:
  1. All listed companies

ROTATION OF AUDITOR

• Applicability of Section 139(2) Rotation of Auditor:

As per rules prescribed in Companies (Audit and Auditors) Rules, 2014, for applicability of section 139(2) the class of companies shall mean the following classes of companies excluding one person companies and small companies-

1. all unlisted public companies having paid up share capital of rupees ten crore or more;
2. all private limited companies having paid up share capital of rupees fifty crore or more;
3. all companies having paid up share capital of below threshold limit mentioned above, but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more.

The concept of rotation of auditor shall not apply to One Person Companies or Small companies .

Case of individual as auditor

no listed company or a company belonging to such class or classes of companies as prescribed above, shall appoint or re-appoint - an individual as auditor for more than one term of five consecutive years;

In case of audit firm as auditor ,

no listed company or a company belonging to such class or classes of companies as prescribed above, shall appoint or re-appoint , an audit firm as auditor for more than two terms of five consecutive years.

As per section 139(2), no listed company or a company belonging to such class or classes of companies as mentioned above, shall 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. Provided that -

1. an individual auditor who has completed his term under clause (a) 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 under clause (b), shall not be eligible for re-appointment as auditor in the same company for five years from the completion of such term

 

The following points merit consideration in this regard-

1. 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.

Every company

2. Every company, existing on or before the commencement of this Act which is required to comply with provisions of this sub-section, shall comply with the requirements of this sub- section within a period which shall not be later than the date of the first annual general meeting of the company held, within the period specified under sub-section (1) of section 96, after three years from the date of commencement of this Act.
3. It has also been provided that right of the company to remove an auditor or the right of the auditor to resign from such office of the company shall not  be prejudiced.
4. Subject to the provisions of this Act, members of a company may resolve to provide that -

1. in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members; or
2. the audit shall be conducted by more than one auditor

5. The Central Government may, by rules, prescribe the manner in which the companies shall rotate their auditors.

Manner of rotation of auditors by the companies on expiry of term – as per rule 6 of companies rules 2014

Rule 6 of the Companies (Audit and Auditors) Rules, 2014 prescribes the manner of rotation of auditors on expiry of their term which is given below-

The Audit Committee shall recommend to the Board, the name of an individual auditor or of an audit firm who may replace the incumbent auditor on expiry of the term of such incumbent.

Where a company is required to constitute an Audit Committee, the Board shall consider the recommendation of such committee, and in other cases, the Board shall itself consider the matter of rotation of auditors and make its recommendation for appointment of the next auditor by the members in annual general meeting.

For the purpose of the rotation of auditors-

in case of an auditor (whether an individual or audit firm), the period for which the individual or the firm has held office as auditor prior to the commencement of the Act shall be taken into account for calculating the period of five consecutive years or ten consecutive years, as the case may be;

the incoming auditor or audit firm shall not be eligible if such auditor  or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms.

Explanation I - For the purposes of these rules the term “same network” includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control.

Explanation II - For the purpose of rotation of auditors,

a break in the term for a continuous period of five years shall be considered as fulfilling the requirement of rotation;

if a partner, who is in charge of an audit firm and also certifies the financial statements of the company, retires from the said firm and joins another firm of chartered accountants, such other firm shall also be ineligible to be appointed for a period of five years.

4. Where a company has appointed two or more individuals or firms or a combination thereof as joint auditors, the company may follow the rotation of auditors in such a manner that both or all of the joint auditors, as the case may be, do not complete their term in the same year.