Resignation and Removal of Auditor under Companies Act

Ashish M. Shaji

06 Sep, 2022

The Companies Act 2013 has changed the rules of the game. There has been a paradigm shift in the provisions relating to the appointment or removal of Auditor. We will take a look at it in this article.

Who is an Auditor?

An Auditor is a person who reviews and verifies the accuracy of financial records and ensures that the company complies with the tax laws. Whether appointment or resignation, all are to be served to the ROC.

Need of an Auditor

All the companies registered under the Companies Act, 2013^[1] or any previous Company law, whether public or private and whether having a share capital or not, are required to maintain proper books of accounts under the provisions of the Act.

Companies have also to get their Books of accounts audited as required under the Act. An audit is an examination of accounting records undertaken with a view to establishing the correctness or otherwise of the transactions reflected therein. It involves intelligent scrutiny of the books of account of a Company with reference to documents, vouchers and other relevant records to ensure that the entries made therein give a true picture of the business. Therefore, there is a need to appoint a Statutory Auditor.

It may be noted that an auditor who is appointed by the company in general meeting cannot be removed by the board of directors of the company before the expiry of his term.

Removal of Auditor

1. A situation where Central Government’s prior approval is required for removal of auditor through Special Resolution:

The auditor can be removed through before the expiry of his term by following the procedure as given below:

• Prior approval of Central Government is required and the application shall be made in Form ADT-2. Along with the form, necessary fees as prescribed shall be paid as laid down in the Companies (Registration offices and Fees) Rules, 2014. [Rule 7(1) of the Companies (Audit and Auditor) Rules, 2014} (Attached in form GNL-2).
• A special resolution of the Company is needed for the removal of an auditor before the expiry of his term.
• The auditor shall be given a reasonable opportunity of being heard before his removal.
• Application as specified above shall be filed within 30days from the date of passing of the resolution.
• The Company should hold the General Meeting (EGM) within 60 days from the approval received from the Central Government.

2. To remove any auditor before the expiry of his term, the following steps/procedure needs to be followed:

Removal of Auditor by Special Resolution will be considered as a Special business for Section-102.

• Since an auditor is appointed for a period of 5 years and 5 years is a long-term relationship therefore removal before 5 years would be considered as removed before the expiry of his term. For removal of an auditor before the expiry of his term strict formalities needed to be followed.

Example: M/s ABC & Co. is an auditor of Tata Ltd. The company wants to remove M/s ABC & Co. in December 2017. Prior approval of CG and other procedure as prescribed under the Act needs to be followed.

Form ADT – 2

The application for removal of auditor before expiry term should be made in Form ADT-2 to Central Government.

Form ADT – 2 requires following information:

• An application seeking the removal of the auditor should clearly state the grounds for removal.
• Any account have been qualified in the last three years (if yes, give details)
• Equal opportunity of being heard to be given to the auditor.
• Proceeding of any kind whether Civil or Criminal, if any, pending between the Company and the concerned officers to be stated clearly.
• Notice of the appointment of auditor along with date and SRN to be submitted.
• Whether any special notice has been received for the removal of auditors.
• All audit fee has been paid to the concerned auditors. If no mention the amount of arrears.
• All the details of the services rendered by auditors to the Company.
• If any audit is remaining, details to be given.
• Stage of accounts of the company for each of such financial year i.e, yet to be approved by the Board or approved by the Board but yet to be handed over to auditors or approved by the Board, handed over to auditors but audit not yet completed or audit completed, draft report not yet given by the auditors.
• If there is any dispute with regard to the Books of Accounts in the possession of auditors but not delivered back to the company. Yes or No.

Resignation by Auditor

Following Compliances to be done by the auditor for resignation:

• Form ADT-3 (attached in GNL-2) need to be filed within 30 days from the date of resignation to the ROC, by the auditor resigning from the office. It should also include the reasons and other facts as may be relevant.
• For Companies other than the Government Company, the auditor shall file such statement with the Company and the Registrar within 30days of resignation.
• For the government-controlled company, the resignation shall be filed within 30 days from the date of resignation to the Registrar, Company and the Comptroller and Auditor General of India (CAG).
• The onus to file the statement containing relevant facts and a reason for resignation is on the resigning auditor and contravention is punishable by a monetary fine which could be minimum Rs. 5000 and Maximum Rs. 5 Lakh.

Form ADT – 3 An auditor who has resigned should file Form ADT-3 within 30 days time from the date of resignation.

Form ADT – 3 Requires Following Information:

Category of Auditor Individual Firm

• Name and PAN details of auditor or auditor’s firm
• Auditor’s company registration number and Membership Number of auditor
• Address of the auditor or auditor’s firm
• City
• State
• Pin code
• Email id of the auditor or auditor’s firm

Other details-

1. Reasons for resignation
2. Whether letter of resignation is attached Yes/No
3. Any other facts relevant to the resignation.

Change of Auditor

Auditors are required to be rotated or changed periodically every five years by the company in order to maintain compliance with the Companies Act 2013. For this special notice should be given stating that a retiring auditor won’t be reappointed. Based on that notice, the auditor can make a representation to the company, accepting or contesting the change.

Conclusion

The Companies Act permits resignation and removal of auditors. Removal can be executed by passing a special resolution whereas resignation can be done by submitting resignation letter to the board of directors. Explore our blogs for rich information on various aspects related to Companies Act.

Read our article: Procedure for Issuance of Duplicate Share Certificate