News & Blog

Disqualification of auditors as per Section 141 of Companies Act ,2013

News & Blog

Disqualification of auditors as per Section 141 of Companies Act, 2013

Auditing the company every year is a very important process. It legitimizes the company’s transactions and brings about transparency between the company and government as far as financial matters are concerned. It is the responsibility of the company to appoint an auditor at the time of forming a company and review their progress annually. Government of India has passed a Companies Act earlier in 1956 and then again in 2013. This Act acts like guidelines for various types of companies to conduct their business in India. Section 141 of the Companies Act, 2013 deals with the appointment of the auditors and their eligibility criteria.

Auditors appointment procedure

At the Company’s first Annual General Meeting (AGM), an independent body like a firm or a person is appointed as an auditor. The said auditor will be eligible to conduct the auditing from the first AGM conclusion till the 6th AGM conclusion and till every sixth AGM afterward. The procedure of selection or in what manner the selection will be carried out is prescribed by the Companies Act, 2013 and only that has to be followed. At every general meeting, members are presented with the auditor’s acceptance and ratification matter. The consent of the auditor should be taken in writing before appointing him or them as an auditor.

The auditor has to provide a certificate stating his procedure of appointment was carried out under the rules prescribed. The certificate should also hold details of eligibility followed mentioned in Section 141 under the heading of qualification and disqualification of auditors. The person or the firm has should be informed of its appointment by the company. A noticing mentioning the auditor’s appointment should also be sent to the office of the Registrar within 15 days of the meeting in the manner prescribed.

Criteria for Auditor’s Disqualification

· The companies Act 2013 in Section 141 and subsection (3) lays down the ground rules for disqualifying people from acting as the company’s auditor. There are a total of 9 clauses, unlike the 1956th version that had only 5 clauses only. The categories in which the disqualifications are divided are;

· Absolute disqualification of Auditor

-Disqualification of auditors based on a relationship

-Disqualification of Auditors based on conflict of interest

Absolute Disqualification of auditors

  • As per Section 141(3) (a), if an entity is not LLP (LLP Act 2008) then an individual or independent body can only act as an auditor for that company. The Companies Act, 1956 completely disqualifies the body corporate which is not the case with Companies Act, 2013 as LLPs are allowed to act as Auditors here.
  • As per 141(3) (g)- a person working full time somewhere else or is a firm partner and holding a position of an auditor in the company, and has reached the limit of 20 companies. This disqualification is newly added in the Companies Act, 2013.
  • For instance, if an auditor is appointed for a 20th firm on 31st March 2018 then he cannot be appointed as an auditor for another firm on 1st April 2018 unless he resigns from being an auditor of any one of the existing 20 companies.
  • As per Section 141(3) (h), if the is a convicted for fraud by the court and 10 years have not elapsed since the conviction date. This is also a new addition in the disqualification section of the Companies Act, 2013.
  • As per the 141(3) (i), if the person is found rendering any services referred in Section 144 of the Companies Act,2013, for the company or its subsidiary company or its holding company.
  • For instance, if “TAB Ltd” is receiving MR. A’s investment banking Services and “TAB Ltd” is a holding Company of “CAT Ltd” then Mr. A is disqualified from acting as an auditor for “CAT Ltd”.

Disqualification based on Relationship

  • As per Section 141(3) (b), any employee or officer of the company. This clause remains unchanged in the 2013th version and is found under Section 2(59) of the Companies Act. The word “officer” broaden to include key managerial Personnel, director, manager or any other person with authority to direct or instruct the Board of directors.
  • As per Section 141(3) (c), any partner, officer or employee of the company is disqualified. In the previous version of the Act only bar an employee or the officer but in the latest version any person related to the employee or an officer is also barred but the rest is retained as it is.

For example, if Mr. Z is an officer or an employee of Company CAT then he cannot act as its auditor. Also, Mr Y who is either an employee or partner of Mr. Z is, barred from being an auditor of CAT by indirect connection.

As per Section 141(3) (f), every person who is relative to a company’s employee, director or anyone holding Key managerial post is disqualified. This is also a new addition in the Companies Act,2013. Section 2(77) defines “relative” as;

  1. HUF member and
  2. Husband and wife as well as father, mother, stepfather, Son, Stepmother, stepson, son’s wife, stepsister, stepdaughter, daughter’s husband, sister.

Disqualification of Auditor based on Conflict of interest

As per section 141(3) (d), if a person’s partner or relative or person himself ;

  • Is holding any interest or Security in the company or the holding or the subsidiary or its associate Company and the interest or security is more than Rs 1 lakh.
  • Is in debt with the company or its holding or its subsidiary or associate company and the debt is more than 5 lakh.
  • Has taken guarantee or provided any security in connection to debt of any third person and the debt is above 1 lakh towards the company or its holding or it’s subsidiary or associate company.

As per Section 141(3) (e), if a firm or a person is indirectly or directly has a business relationship with the company or its holding or it’s subsidiary or associate company then that firm or person is disqualified. The previous version of the Act did not put any boundaries on having such a relationship with the company but only emphasized that if the holding company and subsidiary of the company has disqualified the person from being an auditor then the concerned company automatically disqualifies him from the same.

FAQ

How is companies Act, 2013 different from the Companies Act,1956 in the appointment of auditors?

The companies Act of 2013 is different from the Companies Act of 1956 in terms of auditor’s appointment by its position in the act. In the 1956 version of the Act, the disqualification of Auditors was dealt in Section 226, under the heading “Qualification and Disqualification of Auditors”. In the 2013 version of Companies Act, Section 141 deals with the disqualification of auditors under the heading “Eligibility, Qualification and Disqualification of the auditors.

In the 2013 version, the qualification for the appointment of an auditor is Chartered Accountant. The person can only be eligible to hold this post if he is a CA also the majority of partners can also appoint auditors. This was not the case in the 1956th version of Companies act where any partner of the firm was qualified for an appointment for the firm’s auditor. Also in the 2013th Company Act, only the partner with charted accountant qualification will act on behalf of the auditor in cases of limited Liability Partnership as per Section 141(2).

What all is encompassed in the term business relationship?

Companies (Audit and Auditors) Rules,2014 defines “Business relationship” as any type of transaction that is entered for the commercial purpose except when

  • The transaction’s ALP is in the ordinary business
  • The professional services nature is such that it can be rendered by auditor’s capabilities.

For example, suppose ABC and XYZ shares a commercial relationship under which XYZ gets to buy goods at half price from the market price, then this transaction doesn’t qualify the Arm’s length Price, therefore, XYZ cannot be appointed as ABC Ltd company auditor.

Who all can be appointed as Auditors as per Section 141 of the Companies Act, 2013?

As per Section 141, many people have been disqualified from being an auditor. The only individual who is chartered accountants, a partnership firm of chartered accountant and limited liabilities partnership can act as an auditor to the company. Even then, those who have any ties or conflicts of interest with the company are barred.

What is Section 144 of the Companies Act,2013 is all about?

Section 144 plays an important role in disqualifying the auditors. This section talks of the services like bookkeeping, accounting, etc, from which auditors are barred. His clause was amended in the 2017 amendment act.  According to this, any auditor of the concerned company cannot render service of this nature to these companies or its associate companies do not hold any entities in them and jeopardizing the whole process of auditing.

Registrationseva.com can help in all kinds of Registration in very less time and at an affordable price. You can reach us at info@registrationseva.com or post your query here.

Leave a Reply

Your email address will not be published. Required fields are marked *

We take processes apart, rethink, rebuild, and deliver them back working smarter than ever before.