Appointment of Auditors/ First Auditors

Appointment of first auditors

As per section 224(5), the first auditor or auditors of a company shall be appointed by the Board of directors within one month of the date of registration of the company; and the auditor or auditors so appointed shall hold office until the conclusion of the first annual general meeting. Following provisions are related to the matter:

(i) Appointment of first auditors in general meeting.—A company in general meeting may appoint the first auditor or auditors if the Board of directors fails to exercise its power of appointment of first auditors within one month of the date of incorporation of the company. 224(5)(b)

(ii) Appointment of first auditors through Memorandum and Articles of Association.—The Institute of Chartered Accountants of India has expressed its opinion vide Compendium of Opinion Volume No. 1 that the appointment of first auditors through the Memorandum and Articles of Association of the newly floated private company is not a valid appointment.

(iii) Removal of first auditors.—The company may, at a general meeting, remove first auditor(s) or all or any of such auditors and appoint in his or their places any other person or persons who have been nominated for appointment by any member of the company and of whose nomination notice has been given to the members of the company not less than fourteen days before the date of the meeting 224(5) (a).

(iv) Tenure of office of the first auditor.—The first auditor(s) shall hold office until the conclusion of the first annual general meeting of the company and then be eligible for re-appointment 224(5) (a).

Appointment of auditor shall be an ordinary business

As per section 173(l)( a)(iv) of the Act, the appointment of, and the fixing of the remuneration of the auditors shall be an ordinary business to be transacted at an Annual General Meeting of a company. Only an ordinary resolution is to be passed for this purpose except, in the circumstances stated u/s 224A requiring the passing of a special resolution.

Section 224A

Auditor Not To Be Appointed Except With the Approval Of The Company By Special Resolution In Certain Cases.

(1) In the case of a company in which not less than twenty-five per cent of the subscribed share capital is held, whether singly or in any combination, by -

(a) a public financial institution or a Government company or Central Government or any State Government, or

(b) any financial or other institution established by any Provincial or State Act in which a State Government holds not less than fifty-one per cent of the subscribed share capital, or

(c) a nationalised bank or an insurance company carrying on general insurance business, the appointment or re-appointment

The Department has clarified by Circular No. 2 of 1976, dated 5-6-1976 that the material date for determination of the 25% of the subscribed share capital of the company is held by specified institutions, whether singly or in any combination of others will be the date of the annual general meeting at which the special resolution is required to be passed.

As per Department's Circular No. 5/72, dated 21-2-1972, the appointment or reappointment of auditors at the annual general meeting is one of the items of ordinary business to be transacted at such a meeting.

As per Explantaion I of 224 1(C):-

The expression 'specified number' means—

(i) in the case of a person or firm holding appointment as auditor of a number of companies each of which has a paid-up share capital of less than rupees twenty-five lakhs, twenty such companies;

(ii) in any other case, twenty companies, out of which not more than ten shall be companies each of which has a paid-up share capital of rupees twenty-five lakhs or more.

In computing the specified number of companies in respect of which or any part of which any person or firm has been appointed as an auditor, whether singly or in

combination with any other person or firm, shall be taken into account in computing the specified number as defined in Explanation I of section 224(1C).

The following types of companies shall be excluded from reckoning specified limits, in terms of share capital:—

(a) Guarantee companies (Department's Letter No. 8/12/(224)/74-CL-V, dated 28-9-74)

(b) Foreign companies (Circular No. 21 of TSF No. 35/3/75-CL-III, dated 24-9-1975)

As mentioned above, as per the Companies (Amendment) Act, 2000 private companies will not be taken into account for counting the 20 number of companies audit as specified as per sub-section (1B) of section 224.

(c) Branch audit of the Indian Companies not counted for calculating the specified number.