This article is written by Raunak Kumar Singh, BA.LLB (Hons), 3rd year, University of Lucknow, during his internship at LeDroit India.
KEY WORDS:
- Auditor appointment
- Companies Act,3013
- ICAI (Institute of Chartered Accountants of India)
- Statutory audit
- Auditor duties and powers
- Auditors reports
- Financial liability
ABSTRACT:
The appointment of auditors in a company and their responsibilities form the foundation of a company’s financial accountability. This entire process is prescribed under the Companies Act, 2013. The purpose of appointing auditors, their tenure, rotation, and removal process is to ensure they work independently and impartially, thereby maintaining good governance within the company. The auditor has the right to access the company’s accounting books, investigate suspicious transactions, check the internal control system, and review the financial reports honestly. It is their responsibility to identify fraud, see whether the company is following the legal rules or not, and inform the management, audit committee, and concerned government bodies about any shortcomings. If there is any objection or comment (qualification/adverse finding) in the auditor’s report, it provides transparency to the shareholders.
Auditors have a liability under the law. Oversight bodies such as ICAI (Institute of Chartered Accountants of India) and NFRA (National Financial Reporting Authority) ensure that audit quality and independence are maintained. Thus, the auditor appointment process and their responsibilities combine to enhance confidence in corporate reporting and protect the interests of investors and stakeholders.
INTRODUCTION:
Appointment of auditors in companies and their responsibilities are important pillars of corporate governance and financial accountability. Auditors are independent examiners who examine the financial statements prepared by the company’s management to ensure that they are true, fair, and in accordance with applicable laws and accounting standards.
The Companies Act, 2013, and its rules govern this process, including the appointment, tenure, duties, rights, and responsibilities of the auditor. Its purpose is to maintain auditor independence, avoid conflicts of interest, and bring transparency in financial reporting. The auditor’s job is not limited to just auditing the accounts, but they also confirm to shareholders, creditors, and regulators the company’s financial position and compliance with regulations. India has strengthened auditor oversight in recent years following incidents of financial fraud, through bodies such as ICAI and NFRA. This article discusses in detail the appointment of auditors, their duties, reporting, liability, and recent reforms.
LEGAL FRAMEWORK OF APPOINTMENT:
The appointment of auditors in India is primarily governed by the Companies Act, 2013. As per Section 139 of the Act, every company (except a one-person company) has to appoint an auditor at its first annual meeting (AGM). This auditor remains in office from the conclusion of that AGM till the sixth AGM, i.e., a maximum period of five years.
Further, the appointment has to be communicated to the Registrar of Companies (ROC) within 15 days through Form ADT-1.
To ensure auditor independence, mandatory rotation is applicable in listed companies and certain public companies. An individual can serve a five-year term once, while an audit firm can be appointed twice for five years each, after which it is necessary to take a break of 5 years. Auditors in government companies are appointed through the Controller and Auditor General of India (CAG). Section 147 provides for penalties for violation of appointment and duties.
In the case of Union of India vs Deloitte, the court has given the NFRA the right to investigate the auditor, which strengthens the independence of the auditor. This legal framework strengthens India’s auditing standards globally.
TYPES OF AUDITORS AND ROLE OF ICAI:
There are different types of auditors according to the needs of the company:
- Statutory Auditor: Performs a statutory audit of the company’s financial statements.
- Internal Auditor: Reviews internal control and risk management.
- Cost Auditor: Audits the cost of production or service.
- Secretarial Auditor: Checks the compliance of company laws and governance rules.
ICAI (Institute of Chartered Accountants of India) regulates the auditing profession. It sets auditing and accounting standards, makes rules of ethics, conducts examinations, and takes disciplinary action. ICAI constantly equips auditors with new techniques through training and seminars.
APPOINTMENT PROCESS AND TENURE:
The board of directors of a new company has to appoint the first auditor within 30 days of its formation. If the board of directors does not do so, the shareholders can make the appointment in an extraordinary meeting within 90 days. The auditor is appointed for a term of five years (till the sixth AGM) at the first AGM. Thereafter, approval for reappointment has to be taken at every AGM. Compulsory rotation of auditors is applicable in listed and some public companies. If the auditor resigns or is removed before the term, a special resolution and permission of the Central Government are required. Relevant government forms also have to be filed. This process balances both the independence and continuity of the auditor.
QUALIFICATIONS AND DISQUALIFICATIONS OF AUDITORS:
Auditors can only be chartered accountants registered with ICAI and holding valid certifications.
Causes of disqualification include:
- Being a company (except LLP)
- Being a debtor of the company
- Being a shareholder or officer in the company
- Having a business relationship with the company
- Being convicted of fraud in the last 10 years
- An auditor can audit up to 20 companies at a time, so that quality is maintained.
These rules ensure the impartiality and efficiency of the auditor.
DUTIES AND RIGHTS OF THE AUDITOR:
The auditor has the right to seek information from all accounting books, documents, and employees. They have to check whether the financial statements are true and fair. They evaluate whether the rules are being followed or not. If any fraud is detected, they inform the concerned authorities. They attend the AGM and answer shareholders’ questions. They have a duty to remain independent and confidential throughout the process. Incidents like the Satyam scandal have made the role and responsibility of auditors even more important.
AUDITORS REPORT:
It is the auditor’s official opinion as to whether the financial statements present a true and fair view of the company’s position. The report includes the auditor’s opinion, basis of investigation, key issues, responsibilities of management and the auditor, and additional reporting under CARO. The tone of the report (clean, qualified, negative, or disapproving) has an impact on investors and regulators. A well-prepared report is a means of transparent communication between the auditor and stakeholders.
AUDITORS’ LIABILITIES AND PENALTIES:
The auditor may face civil, criminal, and professional liabilities for negligence, fraud, or breach of duty. The Companies Act provides for fines, imprisonment, and penalties.
Cases like IL&FS show the seriousness of the auditor’s responsibility.
Organisations like ICAI can take disciplinary action, such as suspension. These responsibilities ensure auditor accountability and audit quality.
RECENT REFORMS AND MONITORING MECHANISM:
India has undergone several reforms to enhance audit quality and independence:
- Establishment of NFRA for auditors of large organizations.
- Mandatory rotation of auditors in listed companies.
- Increase in fraud reporting.
- Strengthening of CARO provisions.
- SEBI, ICAI, and NFRA are working together to maintain audit standards and restore public confidence.
CONCLUSION:
The appointment of auditors and their responsibilities are an important pillar of financial accountability, corporate governance, and investor protection in India. In today’s complex corporate environment, the role of auditors is no longer limited to auditing the accounts; they are also entrusted with the responsibility of protecting the interests of shareholders and maintaining the financial transparency of the company.
The Companies Act, 2013, and oversight bodies such as ICAI (Institute of Chartered Accountants of India), NFRA (National Financial Reporting Authority), and SEBI (Securities and Exchange Board of India) govern the appointment, eligibility, powers, duties, and penalties for negligence or malfeasance of auditors.
Mandatory rotation, rules of independence, and reporting obligations such as CARO have been implemented to maintain auditor independence, enhance transparency, and improve audit quality.
Despite these measures, however, incidents such as the Satyam scam and the IL&FS scam have shown that the audit system still needs reform. These scandals have made it clear that we need to tighten audit standards, strengthen auditor independence, and accelerate action by regulatory bodies.
Recent reforms, such as the establishment of the NFRA and the demand for greater disclosure, are a positive step towards regaining public confidence. But to ensure that the audit truly becomes a pillar of good governance, it is important that:
- Existing laws are strictly followed.
- Auditors receive regular training.
- Technological tools such as data analytics are used.
- And a sense of ethical responsibility is promoted in the audit profession.
Finally, the appointment and functioning of an auditor is not just a legal formality but an essential process for trust, transparency, and smooth corporate governance. As businesses grow, the audit profession too must adapt to changing times and meet society’s expectations.
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