The appointment of a company auditor is an essential aspect of corporate governance. The auditor’s role is to ensure that the company’s financial statements are accurate and reliable, which is crucial for maintaining the trust of shareholders, investors, and other stakeholders. There are various modes of appointment of a company auditor, each with its own benefits and drawbacks. In this blog, we will discuss the different modes of appointment of company auditors.
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Appointment by Shareholders:
One of the most common modes of appointment of a company auditor is by the shareholders. The Companies Act, 2013 mandates that every company must appoint an auditor at its annual general meeting (AGM) who shall hold office from the conclusion of that meeting until the conclusion of the next AGM. Shareholders can appoint an auditor by passing an ordinary resolution, which requires a simple majority of votes. This mode of appointment ensures that the auditor is accountable to the shareholders who appoint them, thereby promoting transparency and accountability.
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Appointment by the Board of Directors:
Another mode of appointment of a company auditor is by the Board of Directors. The Companies Act, 2013 allows the Board of Directors to appoint an auditor in case the shareholders fail to do so at the AGM. The auditor appointed by the Board of Directors shall hold office until the conclusion of the next AGM. This mode of appointment is beneficial in situations where the company’s shareholders are unable to reach a consensus on the appointment of an auditor. However, it may be perceived as lacking in transparency since the auditor is accountable to the Board of Directors, who are the company’s management.
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Appointment by the Comptroller and Auditor General (CAG):
The Companies Act, 2013 empowers the Comptroller and Auditor General (CAG) to appoint an auditor for a government company or any other company owned or controlled by the government. The CAG appoints an auditor based on their assessment of the company’s financial performance and other factors. This mode of appointment ensures that the auditor is independent and objective since they are appointed by an external authority.
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Appointment by the Central Government:
The Central Government has the power to appoint an auditor for a company if it receives a report from the Registrar, the Board, or any other person regarding the company’s affairs. The Central Government can appoint an auditor for a specified period or until further orders. This mode of appointment is typically used in situations where there are concerns regarding the company’s financial performance or where there are suspicions of financial irregularities.
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Appointment by the Tribunal:
The Companies Act, 2013 provides for the appointment of an auditor by the National Company Law Tribunal (NCLT) in certain situations. For instance, if a company’s auditor resigns or is removed, and the company fails to appoint a new auditor within 30 days, the NCLT can appoint an auditor to fill the vacancy. Similarly, if the auditor has resigned or has been removed due to fraud or negligence, the NCLT can appoint a new auditor. This mode of appointment ensures that the company has an auditor even in situations where there are issues with the appointment process.
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Appointment by the Securities and Exchange Board of India (SEBI):
The Securities and Exchange Board of India (SEBI) can also appoint an auditor for a listed company if it believes that the company’s financial statements are not reliable or if there are concerns about the company’s financial performance. This mode of appointment ensures that investors have access to reliable financial information and promotes transparency and accountability.
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Rotation of Auditors:
Another aspect of appointment is the rotation of auditors. The Companies Act, 2013 mandates the mandatory rotation of auditors for certain classes of companies. For instance, listed companies and certain classes of unlisted companies have to rotate their auditors every five years. This mode of appointment ensures that the auditor remains independent and objective by preventing them from developing close relationships with the company’s management over an extended period.
Conclusion:
The appointment of a company auditor is a crucial aspect of corporate governance. While there are different modes of appointment available, each mode has its own benefits and drawbacks. It is important for companies to carefully consider the mode of appointment to ensure that the auditor is independent, objective, and accountable. Additionally, the rotation of auditors can also promote independence and objectivity. By appointing an auditor using a transparent and accountable process, companies can build trust with their stakeholders and ensure the reliability of their financial statements.
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Frequently Asked Questions (FAQs)
What is the role of a company auditor?
A company auditor is responsible for reviewing and verifying a company’s financial statements to ensure they are accurate and reliable. They provide an independent assessment of a company’s financial position and performance.
What qualifications are required to become a company auditor?
To become a company auditor, one needs to have completed their Chartered Accountancy (CA) or Certified Public Accountant (CPA) qualification. Additionally, they need to have a thorough understanding of accounting and auditing standards.
What is the difference between an internal auditor and an external auditor?
An internal auditor is an employee of the company who reviews and evaluates the company’s internal controls and processes. On the other hand, an external auditor is an independent professional who provides an objective assessment of the company’s financial statements.
How is the auditor’s remuneration determined?
The auditor’s remuneration is usually determined by the company’s Board of Directors or Audit Committee. It is based on factors such as the size of the company, the scope of the audit, and the complexity of the company’s financial statements.
How often should a company change its auditor?
The Companies Act, 2013 mandates the mandatory rotation of auditors for certain classes of companies. For instance, listed companies and certain classes of unlisted companies have to rotate their auditors every five years. However, a company can change its auditor at any time if they feel it is necessary.
Can the same auditor audit multiple companies?
Yes, an auditor can audit multiple companies, provided there is no conflict of interest. However, the auditor needs to ensure that they maintain their independence and objectivity while auditing each company.
What is an audit report?
An audit report is a document issued by the auditor after reviewing and verifying the company’s financial statements. The report provides an assessment of the accuracy and reliability of the financial statements and any issues that were identified during the audit.
What is the difference between a qualified and an unqualified audit report?
An unqualified audit report indicates that the auditor has reviewed the company’s financial statements and found no material misstatements or errors. On the other hand, a qualified audit report indicates that the auditor has identified a material misstatement or error in the financial statements.
What happens if the auditor identifies fraud during the audit?
If the auditor identifies fraud during the audit, they are required to report it to the appropriate authorities, such as the Central Bureau of Investigation (CBI) or the Serious Fraud Investigation Office (SFIO). Additionally, they may also be required to disclose the fraud in their audit report.
Can a company’s management override the auditor’s findings?
No, the company’s management cannot override the auditor’s findings. The auditor is an independent professional who provides an objective assessment of the company’s financial statements. However, the management can dispute the findings and provide additional information or clarification to the auditor.
