Rotation of Auditors as per the Companies Act, 2013

Tenure of Appointment of Individual or Audit Firm as Auditor

According to section 139(2), an Individual Auditor shall not be appointed or re-appointed for more than ONE term of five consecutive years and an Audit Firm shall not be appointed or re-appointed for more than TWO terms of five consecutive years in Listed Companies or any company belonging to prescribed class or classes of companies.


Class or Classes of Companies prescribed in Rule 5 of Companies (Audit and Auditors) Rules, 2014 are as under:

a) Unlisted Public Companies: All Unlisted Public Companies having paid up share capital of Rs 10 crores or more.

b) Private Companies: All Private Limited companies having paid up share capital of Rs 20 crores or more.

c) Other Companies: All Companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of Rs 50 crores or more.

Point to be noted: Provisions relating to Rotation of Auditors are not applicable to One Person Company and Small Companies.

Also Rotation of auditors does not apply to Dormant companies (proviso to rule 6 of Companies (Miscellaneous) Rules, 2014)


Restrictions on reappointment of Auditors and mandatory rotation of Auditors/ Audit Firm

Cooling off Period :

Break in the term for a continuous period of 5 years will be considered as fulfillment of criteria of rotation. (explanation 2 to rule 6(3)(ii)).

Network Firms:

These include firms having common control, brand or trademark so an auditor will be ineligible for appointment if he belongs to the same network firm.

Common Partners:

An audit firm having common partners or partners of other audit firm whose tenure has expired immediately preceeding the financial year shall not be eligible for appointment of the same company for a period of 5 years.

Certifying Partner:

If a Partner who is in charge of an Audit Firm, certifies the financial statements of the Company and then retires from the said firm and joins another firm of chartered Accountants, then such other firm shall also be ineligible to be appointed for a period of five years.


Manner and Procedure for Selection and Appointment of Auditor

Rule 6 of the Companies (Audit and Auditors) Rules, 2014 prescribes the following manner of Rotation of Auditors by the Companies:

1. The Audit Committee shall recommend to the Board, the name of an individual Auditor or of an Audit Firm who may replace the incumbent Auditor on expiry of the term of such incumbent.

2. Where a Company is required to constitute an Audit Committee, the Board shall consider the recommendation of such committee, and in other cases, the Board shall itself consider the matter of rotation of Auditors and make its recommendation for appointment of the next auditor by the members in Annual General Meeting


Transition Period of 3 Years

The 3rd Proviso to Sec 139(2) provides the transition period of 3 years to the existing Companies on or before the commencement of this Act to comply with the requirements of these provisions within three years from the date of commencement of this Act.

Note on Applicability of Audit committee:

Section 177 of the Companies Act, 2013 and Rule 6 and 7 of Companies (Meetings of Board and its Powers) Rules, 2014 deals with the Audit Committee.

The Board of directors of every listed company and the following classes of companies, as prescribed under Rule 6 of Companies (Meetings of Board and its powers) Rules, 2014 shall constitute an Audit Committee.

(i) all public companies with a paid up capital of Rs.10 Crores or more;

(ii) all public companies having turnover of Rs.100 Crores or more;

(iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs.50 Crores or more.

The paid up share capital or turnover or outstanding loans, or borrowings or debentures or deposits, as the case may be, as existing on the date of last audited Financial Statements shall be taken into account for the purposes of this rule.

You may wish to read other articles on the Companies Act, 2013:

Compliances for Private Limited Companies under the Companies Act, 2013

Company Registration fees – Companies Act, 2013

Director under the Companies Act, 2013

Appointment/Removal of Auditors under the Companies Act, 2013

Share Transfer Procedure as per the Companies Act, 2013

Post written by CA Jyoti Singhal.

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