First Auditor and Auditor Rotation under Section 139: A Guide for New Foreign-Owned Companies

The appointment of the auditor is one of the first acts of a new company, and mistakes in the first year tend to repeat. Section 139 of the Companies Act, 2013 sets out how the first auditor is chosen and how long the auditor can continue. This note is written for foreign-owned subsidiaries.

The first auditor

• The Board appoints the first auditor within 30 days of the date of registration of the company. The auditor holds office until the conclusion of the first annual general meeting.
• If the Board fails to do so, it informs the members, who can appoint the first auditor at an extraordinary general meeting within the next 90 days. The auditor then holds office until the first AGM.

Subsequent terms

• At the first AGM the members appoint an auditor, who holds office from the conclusion of that meeting to the conclusion of the sixth annual general meeting thereafter, subject to ratification rules as applicable.
• An individual auditor can serve for a term of five consecutive years, and an audit firm for two terms of five consecutive years each. The rotation rules apply to certain classes of company, such as listed companies and certain larger private companies, set out in the rules.
• The appointment is reported in Form ADT-1 within 15 days of the meeting.

Eligibility and independence

• The auditor must be a chartered accountant in practice, and the firm must consent in writing along with a certificate that the appointment is within the limit on the number of audits and that no disqualification applies.
• The Act bars an auditor from certain relationships with the company, its holding company or subsidiaries, and from certain non-audit services.

Points for foreign groups

• The group may have a global network auditor. If the Indian audit is done by a different firm, plan the reporting package for consolidation early.
• Group audit instructions and the Indian statutory audit timetable should be set together.
• Auditor fees and any reimbursement of expenses should be agreed in a letter of engagement.

The author is an M.Com., FCS, LL.B., is a Partner at A2 Consultants, Hyderabad, which advises foreign companies on entering and operating in India. The views are personal and for general information only.