rule 10 companies act 2013 - rotation of auditors, their appointment & disqualifications

Rotation of Auditors, their Appointment & Disqualifications

Desai Saksena & Associates

Rotation of Auditors, their Appointment & Disqualifications By CA Alok K Saksena, Partner, Desai Saksena & Associates

[email protected]

Finally the Companies Act 2013 has seen the light of the day and with the notification of

Rules, the Act 2013 and the rules become effective from April 1st 2014. Only certain

Sections and Rules concerning the operation and references of the NCLT and NFRA have

yet to be notified. One of the biggest concerns of the practicing Chartered Accountants and

Industry is concerning the Rotation of Auditors and their appointment.

Companies (Audit and Auditors) Rules, 2014 notified on 31st March 2014 and has provided

substantial relief to the Practicing Chartered Accountant with respect to rotation and their

appointment and reappointment. Substantial changes have been made from the earlier

draft rules which were circulated.

Analysis of Act & Rules relating to Rotation of Auditors:

A. To decide whether the company is required to rotate the auditors or not, the first

check that must be made is whether the company is in the exclusion list.

Following class of company are excluded from rotating their auditors

1. One person company (Rule 5 of Companies (Audit and Auditors) Rules, 2014)

2. Small Company (Rule 5 of Companies (Audit and Auditors) Rules, 2014)

A small company as per Section 285 of Companies Act 2013 and as per

relevant rules a company other than a public company

(i) paid-up share capital of which does not exceed fifty lakh rupees or such

higher amount as may be prescribed which shall not be more than five crore

rupees; or

(ii) turnover of which as per its last profit and loss account does not exceed

two crore rupees or such higher amount as may be prescribed which shall

not be more than twenty crore rupees:

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act;

mailto:[email protected]



After taking into account the rules, Small Company means the private company whose

paid up capital does not exceed Rs. 50 Lacs or Its Turnover does not exceed two crores.

If either of the condition is not fulfilled it will not be a small company. Further even if it

qualifies as small company, it must not be holding or subsidiary company or a Section 8

Company (Old Section 25 Co. Act 1956) or govern by special act viz. Electricity company

etc.

3. Unlisted Public Company Having Paid up Share Capital of Less than Rs. 10 Crores

However, where the paid up capital is less than Rs. 10 Crores, it must be ensured

that borrowing from financial institution, Banks or Deposit are also less than Rs, 50

crores (Rule 5 (a) & (c)) Therefore what it implies is that even unlisted public

companies having paid up share capital of Less than Rs. 10 Crores but Borrowing of

Rs. 50 Crore and above would not be eligible for exclusion from rotation of Auditor.

4. Private Limited Company having Paid up Share capital of less than Rs. 20 Crores

However, where the paid up capital is less than Rs. 20 Crores, it must be ensured

that borrowing from financial institution, Banks or Deposit are also less than Rs. 50

crores (Rule 5 (a) & (c))

Therefore what it implies is that even private companies having paid up share

capital of Less than 20 Crores but Borrowing of Rs. 50 Crore and above would not be

eligible for exclusion from rotation of Auditor.

The exclusion list given above provides substantial relief to Proprietor and the Audit

firms. Listed Companies would be subjected to Rotation. The relief is mainly to unlisted

public companies and private companies fulfilling certain criteria of Paid up capital and

borrowing,

B. Once it is determined that the proprietor or the audit firm are not in the exclusion list it

would then be subjected to Rotation.



Manner of Rotation

On a close reading of 139(2) of Companies Act 2013 and Rule 6 of Companies (Audit and

Auditors) Rules, 2014 the following point emerges:

1. All Auditors of Listed Companies and Auditors of Companies liable for rotation (Not

in the exclusion list (A.) above will rotate as under:

i. Proprietary firms shall rotate after completing 5 years ( One terms of 5

Years)

ii. Audit firms shall rotate after completing 10 years (2 terms of 5 years)

iii. The cooling period is 5 years. i.e. After completing the term 5/10 years

the Proprietor or Audit firm cannot be appointed for 5 years.

iv. The period for which the Proprietor or Audit firm has held office as

Auditor prior to the commencement of the Act shall be taken into the

account for calculating the period of 5 years/ 10 years.

v. Transition period of Three years have been given to comply with this

requirement of Rotation.

The Effect of Para (i) to (v) is given below:

For Proprietary Concern

Number of consecutive years for which an individual auditor has been functioning as auditor in the same company [in the first AGM held after the commencement of provisions of section 139(2)]

Maximum number of consecutive years for which he may be appointed in the same company (including transitional period)

Aggregate period which the auditor would complete in the same company in view of column I and II

5 years (or more than 5 years) 3 years 8 years or more

4 years 3 years 7 years



1 year 4 years 5 years



For Audit Firm

Number of consecutive years for which an audit firm has been functioning as auditor in the same company [in the first AGM held after the commencement of provisions of section 139(2)]

Maximum number of consecutive years for which the firm may be appointed in the same company (including transitional period)

Aggregate period which the firm would complete in the same company in view of column I and II

10 years (or more than 10

years) 3 years 13 years or more










Notes:

1. In reckoning the consecutive years in Column 1 above all the preceding financial

years for which the Auditor or Auditor firm has been Auditor shall be counted until

there has been break of 5 years or more.

2. During his tenure as Auditor the following Services cannot be rendered directly or

indirectly by the Auditor or else may face disqualification under 141 (3) (i).

(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



3. Limit

The Limit of Private Limited, Public Limited and Listed is 20 Companies per Partner

other than one person Companies dormant Companies, small Companies and

private Companies having paid-up capital less than Rs. 100 corers under Section

141(3)(g).

4. The Incoming Auditor or Audit firm shall not eligible if such Auditor or Audit Firm is

associated with the Outgoing Auditor or Audit Firm under the same network of

Audit Firms. Same Network includes the firm operating or functioning under the

same brand name, trade name or common control.

5. Break in the term for a continues period of 5 years shall be considered as fulfilling

the requirement of rotation.

rule 10 companies act 2013 - rotation of auditors, their appointment & disqualifications

Business