Appointment, Removal & Remuneration of Company Auditor

1. Appointment of First Auditor (Section 139(6) & 139(7))

The statutory mechanisms for appointing the first auditor depend on whether the company is a Non-Government Company or a Government Company:

Appointment of First Auditor: Non-Govt vs. Govt Companies

Non-Government Company (Sec 139(6))

Step 1 (Board of Directors): Appointed by the Board within 30 days from the date of incorporation.
Step 2 (Shareholders Fallback): If the Board fails to appoint within 30 days, it must inform members, who shall appoint the auditor at an Extraordinary General Meeting (EGM) within 90 days.
Tenure: Holds office until the conclusion of the 1st Annual General Meeting (AGM).

Government Company (Sec 139(7))

Step 1 (C&AG): Appointed by the Comptroller and Auditor General of India (C&AG) within 60 days of registration.
Step 2 (Board Fallback): If C&AG fails, the Board appoints within the next 30 days.
Step 3 (EGM Fallback): If Board fails, members appoint at an EGM within the next 60 days.
Tenure: Holds office until the conclusion of the 1st AGM.

2. Appointment of Subsequent Auditors (Section 139(1))

For non-government companies, every subsequent auditor is appointed by shareholders at the Annual General Meeting (AGM):

Tenure: An auditor holds office from the conclusion of that AGM until the conclusion of the sixth AGM (a tenure of 5 consecutive years).
Written Consent & Certificate: Before appointment, the auditor must submit a written consent and a formal eligibility certificate confirming compliance with Section 141 and that the appointment is within ceiling limits.
Intimation to ROC: The company must file notice of appointment with the Registrar of Companies (ROC) within 15 days of the AGM using Form ADT-1.

Subsequent Auditor in Government Companies (Section 139(5)): The C&AG appoints the auditor within 180 days from the commencement of the financial year, holding office till the conclusion of the next AGM.

3. Mandatory Rotation of Auditors (Section 139(2))

To prevent excessive familiarity between management and auditors, mandatory rotation applies to:

All listed companies.
All unlisted public companies having paid-up share capital of INR 10 Crore or more.
All private limited companies having paid-up share capital of INR 50 Crore or more.
All companies having public borrowings/deposits from financial institutions of INR 50 Crore or more.

Statutory Tenure and Cooling-Off Periods under Section 139(2)

Individual Auditor 1 Term of 5 Consecutive Years:

An individual auditor can serve for a maximum of one 5-year term, followed by a mandatory cooling-off period of 5 years before being eligible for reappointment.

Audit Firm 2 Terms of 5 Consecutive Years (10 Years Total):

An audit firm can serve for a maximum of two 5-year terms (10 consecutive years), followed by a mandatory cooling-off period of 5 years.

4. Filling of Casual Vacancy (Section 139(8))

A casual vacancy arises when an auditor’s office becomes vacant before the expiry of their statutory term due to death, disqualification, or resignation:

Nature of Casual Vacancy	Approving Authority & Statutory Timeline	Tenure of Appointed Auditor
Due to Death, Disqualification, or Insolvency	Board of Directors fills the vacancy within 30 days.	Holds office until the conclusion of the next AGM.
Due to Resignation of Auditor	Board approves within 30 days, but must be ratified by shareholders at a general meeting within 3 months of the Board’s recommendation.	Holds office until the conclusion of the next AGM.
In a Government Company	Vacancy filled exclusively by the Comptroller and Auditor General of India (C&AG) within 30 days (if C&AG fails, Board fills within next 30 days).	Holds office until the conclusion of the next AGM.

Statutory Duty of Resigning Auditor (Section 140(2) & 140(3)):

An auditor who resigns from a company must file a formal statement in Form ADT-3 within 30 days of resignation with the company and the ROC (and C&AG in government companies), stating the reasons and facts for resignation. Failure to file ADT-3 attracts minimum statutory penalties of INR 50,000 or the auditor’s remuneration, whichever is less.

5. Removal of an Auditor Before Expiry of Term (Section 140(1))

Because corporate management might attempt to fire an honest auditor who uncovers fraud, the law imposes stringent safeguards:

Stringent Procedural Chain for Premature Removal of Auditor

Board Resolution

Board passes resolution to remove auditor before term expiry

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Central Govt Approval

File Form ADT-2 with Central Govt (MCA) within 30 days

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Special Resolution

Pass Special Resolution at general meeting within 60 days of approval

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Right to be Heard

Auditor must be given reasonable opportunity of representation

6. Remuneration of Auditors (Section 142)

Under Section 142:

Fixing Authority: The remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein. For the first auditor appointed by the Board, remuneration may be fixed by the Board.
Components Included: Remuneration includes the audit fees plus all expenses incurred by the auditor in connection with the audit (travel, boarding, lodging).
Exclusion: It does not include any remuneration paid to the auditor for any other non-audit services rendered at the request of the company.

7. Key Exam Review Questions

Explain the procedure for appointing the first auditor of: (a) a Non-Government Company, and (b) a Government Company.
What are the legal provisions regarding the mandatory rotation of auditors under Section 139(2)?
Discuss the procedure for removing a statutory company auditor before the expiry of their term under Section 140(1).

Appointment, Removal & Remuneration of Company Auditor | B.Com Notes