Everything About Auditors and Appointment of First Director

In theory, auditors are professional watchdogs, appointed by the shareholders, who check the genuineness of financial statements prepared by the management of the company and form an opinion for the shareholders who have made the management, in some sense, trustees of their assets. The role of auditors has evolved over the years and our economy’s exposure to financial scams have raised questions on auditors’ role and independence. Nonetheless, they continue to play a vital role in creating the trust of investors. The Companies Act, 2013 (herein referred to as the Act) mandates appointment of financial auditors in the company from the very beginning of a company’s life. This blog is a compilation of all the compliances related to appointment of first auditor and all the matters related therewith.

As per the Act, the first auditor of the company is not appointed by the shareholders but by the management, that is, the Board of Directors. The first auditor holds the position only till the first AGM of the Company.

The first meeting of the Board is required to be held within 30 days of incorporation and among the agenda there needs to be appointment of auditor. The directors need to come to an agreement on the auditor to be appointed and check their qualifications. Currently, only qualified Chartered Accountants who hold a certificate of practice from the Institute of Chartered Accountants of India are eligible to become auditors individually or as a partnership firm, including an LLP.

Pre Appointment Compliances: The Board of Directors need to pass a resolution in the said meeting resolving the auditor to be appointed and fixing their remuneration. The copy of the resolution is required to be enclosed with the appointment letter given to the auditor. The auditor's consent along with a declaration that they are not disqualified under section 141  is required before appointment.

Post Appointment Compliances: The appointment needs to be approved by the shareholders of the company in the next Annual General Meeting. 

The company may register the appointment with the Registrar of Companies in form ADT-1. While complying with this requirement is not mandatory, good governance demands that it be done.

What are the services that the appointed auditor cannot provide?

Section 144 gives an interesting list of services that an auditor cannot provide to the company directly or indirectly. These are:

(a) accounting and book-keeping services;

(b) internal audit;

(c) design and implementation of any financial information system;

(d) actuarial services;

(e) investment advisory services;

(f) investment banking services;

(g) rendering of outsourced financial services; 

(h) management services; and 

(i) any other kind of services as may be prescribed (Nothing has been prescribed so far).

While debatable that it is not following the law in spirit, literal interpretation of this section would reveal tax consultancy services do not form part of this list.

Penalty for breach of section 144: Contravention of section 144 would attract penalty under section 147(2) which makes the auditor liable to fine of minimum Rs. 25,000/- but which may extend to Rs. 5,00,000/- or 4 times the remuneration of the auditor, whichever is less.

However If an auditor has knowingly or wilfully with the intention to deceive the company or its shareholders or creditors or tax authorities, contravened this section, he shall be punishable with imprisonment for a term which may extend to 1 year and with minimum fine of Rs. 50,000/- but which may extend to Rs. 25, 00,000/- or 8 times the remuneration of the auditor, whichever is less.