First Auditor Appointment: Legal Requirements for New Companies
Starting a new company in India is a major milestone, but it also brings a set of legal responsibilities. One of the most critical tasks after incorporating your business is the first auditor appointment.
At My Finance Gyan, we aim to simplify complex legal jargon so you can focus on growing your business. In this guide, we will break down the rules, procedures, and Section 139 of Companies Act 2013 regarding how to appoint the person who will check your company’s accounts.
Who Appoints the First Auditor?
One of the most common questions new founders ask is: who appoint first auditor of a company? The responsibility primarily lies with the Board of Directors. According to the law, the directors must ensure the appointment of an auditor shortly after the company is born. If the Board fails to do this, the responsibility then shifts to the shareholders (members) of the company.
The first auditor appointment is mandatory for every company, whether it is a small private company or a large public one. This professional ensures that your financial statements are transparent and follow the law.
Legal Provisions Under Companies Act 2013:
The appointment of auditor companies Act 2013 is governed mainly by Section 139 of Companies Act 2013. Under Sec 139 of Companies Act 2013, the rules are divided based on the type of company:
- Non-Government Companies: The Board must appoint the auditor within 30 days of registration.
- Government Companies: The Auditor and Comptroller General of India (C&AG) is responsible for the appointment within 60 days of registration.
Failure to comply with these timelines can lead to penalties and legal hurdles during your first annual filing.
Appointment Procedure of First Auditor:
The appointment of first auditor follows a specific legal path. Here is the simple step-by-step statutory auditor appointment process:
- Board Meeting: Hold a meeting of the Board of Directors within 30 days of incorporation.
- Pass a Resolution: The Board passes a formal resolution to approve the appointment of statutory auditor.
- Obtain Consent: Before the appointment, the company must get a letter of auditor appointment and a written consent from the auditor stating they are eligible.
- Informing the Auditor: The company sends an official intimation to the auditor.
- Filing with ROC: While not always mandatory for the first auditor of a private company (unlike subsequent ones), it is a good practice to file the auditor appointment form (Form ADT-1) with the Registrar of Companies (ROC) to keep records clean.
If the Board fails to appoint someone within 30 days, it must inform the members. The members then hold an Extraordinary General Meeting (EGM) within 90 days to complete the appointment of an auditor.
Term and Rotation of Auditors:
The first auditor appointment is not for a long term. The first auditor holds office from the conclusion of the first Board Meeting until the conclusion of the First Annual General Meeting (AGM).
A. Rotation of Auditors: Once the first AGM is held, a permanent auditor is appointed for a 5-year term. However, the law has rules for the rotation of auditors to ensure independence:
- Individual Auditors: Can serve one term of 5 years.
- Audit Firms: Can serve two terms of 5 years each (total 10 years).
The auditor rotation applicability mostly applies to listed companies and certain unlisted public or private companies that cross specific turnover or debt thresholds.
Qualifications and Eligibility of an Auditor:
Who can be an auditor in India? Not just anyone with a finance degree can do this. An auditor under the Companies Act 2013 must be a practicing Chartered Accountant (CA).
A. Qualification of Company Auditor:
- The person must hold a valid Certificate of Practice (COP) from the ICAI.
- In the case of a firm, the majority of partners practicing in India must be CAs.
B. Who Cannot be Appointed?
- An officer or employee of the company.
- A person who is indebted to the company for more than ₹5 Lakhs.
- A person who has been convicted of fraud by a court.
Interestingly, while the statutory auditor appointment requires a CA, an internal auditor is appointed by the Board and can be a CA, a Cost Accountant, or another professional as decided by the management.
Rights and Powers of the Auditor:
An auditor under the Companies Act 2013 is given significant powers to ensure they can work without interference:
- Right of Access: They can check the books of accounts and vouchers at any time.
- Right to Information: They can demand explanations from any officer of the company.
- Right to Attend General Meetings: They receive all notices of general meetings and have a right to be heard on matters concerning them as auditors.
- Right to Sign Audit Reports: Only the auditor can sign the audit report or financial certifications.
Resignation and Removal of Auditor:
Sometimes, a change is necessary before the term ends.
A. Casual Vacancy:If an auditor resigns or passes away, it creates a casual vacancy of auditor.
- In case of resignation, the Board must fill the vacancy within 30 days, but this must also be approved by shareholders within 3 months.
- The appointment of an auditor in a casual vacancy is vital to ensure there is no gap in financial oversight.
B. Removal: Removing an auditor before their term ends is difficult. The company needs special permission from the Central Government and must pass a special resolution in a general meeting. This protects the auditor from being fired for being “too strict” with the accounts.
Conclusion:
Understanding the first auditor appointment is essential for every new entrepreneur in India. From following Section 139 of Companies Act 2013 to ensuring the statutory audit applicability is met, these steps build the foundation of a transparent and law-abiding company.
At My Finance Gyan, we want to make sure your compliance journey is smooth. Always remember that the appointment of an auditor is not just a checkbox; it is about hiring a financial guardian for your business.
Do you need help with your company’s compliance? If you need expert help with your first auditor appointment or filing the auditor appointment form, then choose Startup Portal Business Services for professional and hassle-free assistance.
