Rotation of Auditor

Sub – section (2) of this section 139 of the Companies Act, 2013 discussed earlier here expressly say that provide that no listed company or some other companies as notified shall appoint or re – appoint (i) an individual for more than one term of five consecutive years, or (ii) an audit firm for more than two terms of five consecutive years. Any audit firm shall not be appointed as auditor which has any common partner or partners with the firm whose tenure has expired in the company immediately preceding financial year.

For the purposes of sub-section (2) of section 139, the class of companies shall mean the following classes of companies excluding one person companies and small companies:-

• all unlisted public companies having paid up share capital of rupees ten crore or more;
• all private limited companies having paid up share capital of rupees twenty crore or more;
• 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 rupees fifty crores or more. [Rule 5 of the Companies (Audit and Auditors) Rules 2014]

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. [sub – rule (1) of Rule 6]

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. [sub – rule (2) of Rule 6]

(3) For the purpose of the rotation of auditors-

(i) in case of an auditor (whether an individual or audit firm), the period for which the individual or the firm has held office as auditor prior to the commencement of the Act shall be taken into account for calculating the period of five consecutive years or ten consecutive years, as the case may be;

(ii) the incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms. [sub – rule (3) of Rule 6]

The term “same network” includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control. [Explanation I to sub – rule (3) of Rule 6]

For the purpose of rotation of auditors,-

(a) a break in the term for a continuous period of five years shall be considered as fulfilling the requirement of rotation;

(b) if a partner, who is in charge of an audit firm and also certifies the financial statements of the company, retires from the said firm and joins another firm of chartered accountants, such other firm shall also be ineligible to be appointed for a period of five years. [Explanation II to sub – rule (3) of Rule 6]

Where a company has appointed two or more individuals or firms or a combination thereof as joint auditors, the company may follow the rotation of auditors in such a manner that both or all of the joint auditors, as the case may be, do not complete their term in the same year. [sub – Rule (4) of Rule 6]

Illustration 1 explaining sub – rule (3) suggest that in case of individual auditor has completed two or more years, present auditor may continue up to three years from the commencement of these Rules. Where auditor has completed one year, he may be auditor up to next four years, making a five years term.

Illustration 2 explaining sub – rule (3) suggest that in case of audit firm has completed seven or more years, present auditor may continue upto three years from the commencement of these Rules. Where auditor has completed less than 7 years, he may be auditor up to next four or more years, making a single ten years term.