Understanding the Companies Act, 2013 Legal Provisions for Auditor Removal

Overview : An auditor plays a key role in maintaining transparency, accountability and compliance in the financial reporting of a company in India. However, in certain conditions, a company may require the removal of an auditor even before the completion of their tenure. Learn about essential aspects such as legal framework, reasons for auditor removal, step-by-step process and penalties for non-compliance.

An auditor is an individual/firm which is appointed by the board of directors of a company and is entrusted with the role of reviewing, verifying and maintaining a company's overall financial records and reports. Only a Chartered Accountant (CA) currently in practice or a firm of CAs are eligible to be appointed as an auditor of a company in India. They also ensure that the company complies with various tax laws. Sometimes, a company may need to remove its auditor even before their term terminates.

Auditor Removal or removal of an auditor from a company is regulated under the Companies Act, 2013, primarily governed by Sections 139 and 140. These provisions mandates that an auditor's removal is carried out in a legally fair and justified manner and maintain the integrity of financial audits. This article helps you understand the provisions for auditor removal under the Companies Act, 2013, the step-by-step process, the penalties levied for non-compliance, and the implications of removal of an auditor in a company.

Legal Framework Governing Auditor Removal

The Appointment as well as Removal of an auditor in a company are two important aspects outlined under the Companies Act, 2013. Section 139 of this Act deals with the appointment of auditors while Section 140 lays down the provisions for their removal, resignation and penalties for non-compliance.

The law ascertains that an auditor can't be removed arbitrarily by the company as it must follow the due process for the removal of an auditor. It's a crucial aspect as auditors serve as independent watchdogs, ensuring that the financial statement of the company displays a true and fair financial picture of the company.

Under the Act, an auditor can be removed before the completion of their term only through a special resolution passed in a general meeting, and prior approval from the Central Government must be obtained.

Reasons for Auditor Removal

There are several reasons why a company may take steps to remove an auditor before the expiration of their term. Some of the common reasons for auditor removal are as below:

• Loss of Confidence : If the Board of Directors or shareholders feel that the auditor is not performing their duties effectively, lacks due diligence, or has failed to detect significant financial irregularities in the company's book, in such conditions, they may decide to remove the auditor from immediate effect.
• Conflict of Interest :If the auditor is found to have undisclosed conflicts of interest, for instance, if he is engaged in business dealings with the company’s competitors, their removal may be necessary to maintain financial integrity of the company.
• Lack of Independence : Independence is one of the key principles of auditing. If an auditor is suspected of colluding with management or compromising their impartiality, the company may seek to replace or remove them.
• Non-Compliance with Regulations : If an auditor fails to comply with the statutory requirements under the Companies Act, 2013 or other applicable laws and auditing standards, removal may be warranted.
• Fraudulent Practices : If an auditor is found to be involved in any kind of fraudulent activities, he/she may be removed under Section 140(5) of the Act.

Procedure for Removal of an Auditor Before Expiry of Term

The removal of an auditor before his term expiry is a structured process, and therefore, a company needs to follow certain legal steps. The steps are described below:

Step 1 : Board Resolution

It's important to first convene a Board Meeting. The purpose of this meeting is to discuss the auditor's removal. Furthermore, the board needs to pass a resolution for removing the auditor and also obtaining approval from the concerned government bodies.

Step 2 : Application to the Central Government

Once the Board approves the resolution, the company must file an application in Form ADT-2 with the Ministry of Corporate Affairs (MCA) within 30 days from the date of passing the Board Resolution. The application should include the reasons for removal and any supporting documents.

Step 3 : Government Approval

The Central Government deeply examines the details and documents attached with the application and may also ask for additional details or clarifications if not satisfied. Upon successful verification, approval for the removal of an auditor is granted. This is how this verification process helps prevent arbitrary act of removal of the auditor, ensuring that the decision is justified.

Step 4 : Special Resolution in General Meeting

Within 60 days of obtaining approval from the Central Government, the company must convene a General Meeting of shareholders and pass a special resolution for approving the removal of the auditor.

Step 5 : Filing with Registrar of Companies (RoC)

After the special resolution is passed, the company must file Form MGT-7 with the Registrar of Companies (RoC), along with the minutes of the general meeting and the special resolution.

Removal of Auditor by the Tribunal (Section 140(5))

Apart from the company’s initiative, an auditor may also be removed by the National Company Law Tribunal (NCLT) if they are found guilty of fraud or collusion with management.

• The Central Government, any concerned party, or a regulatory authority may apply to the NCLT for the removal of the auditor.
• If the NCLT determines that the auditor has been involved in fraudulent activities, they may be removed, and the auditor is barred from appointment in any company for five years.
• The auditor may also be liable for penalties and legal action under the Companies Act and other applicable laws.

Auditor’s Right to Resign (Section 140(2))

Auditors also have the right to resign before the completion of their tenure. If an auditor decides to resign :

• They must file Form ADT-3 with the RoC within 30 days from resignation date.
• They must provide the company with a written statement explaining the reasons for their resignation.
• The company is then required to appoint a new auditor in accordance with Section 139.

Penalties for Non-Compliance

Failing to comply with the auditor removal provisions under Section 140 may attract many penalties. The following penalties may be levied if not comply with the said provisions;

• If a company fails to comply with the auditor removal process, it may have to face monetary penalties or/and legal actions from the concerned regulatory authorities.
• An auditor failing to file the statement of resignation in Form ADT-3 can be levied a fine of ₹50,000 or an amount equal to their remuneration; any one whichever is lower.
• Failure to comply continuously may result in an additional fine of ₹500 per day, which can go up to ₹2 lakh.

Impact of Auditor Removal

Removing an auditor before the completion of their term has significant implications:

• Reputational Damage : Frequent changes in auditors can raise concerns over the financial transparency of the company.
• Regulatory Scrutiny : Authorities may scrutinize the company’s financials more closely if it removes an auditor due to compliance issues.
• Operational Disruptions : An auditor removal can delay the finalization of the financial statements, audits and compliances.
• Impact on Stakeholders : With frequent changes in auditors, the company may lose credibility so it may result in losing confidence of Shareholders, Investors and Creditors in the company's financial practices.

Conclusion

An auditor removal is a serious matter that is governed by Section 140 of the Companies Act, 2013. This Section ensures that the auditor removal is followed diligently and also compliance with legal requirements. Adhering to the statutory provisions, companies can maintain financial integrity, transparency, and accountability to gain and enjoy stakeholders' confidence in a long run. It is often advisable to consult with legal and financial professionals to ensure compliance with the law and avoid regulatory repercussions.

Would you like expert guidance on auditor removal or compliance matters? Feel free to reach out to Setindiabiz professionals!

Author Bio

Editorial Team | in

Setindiabiz Editorial Team is a multidisciplinary collective of Chartered Accountants, Company Secretaries, and Advocates offering authoritative insights on India’s regulatory and business landscape. With decades of experience in compliance, taxation, and advisory, they empower entrepreneurs and enterprises to make informed decisions.