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Can an Audit firm be re-appointed for a term less than 5 years - Answer is 'YES'

Rotation of statutory auditor

Meaning of appointment: Appointment includes re-appointment.

Term: Term means a period of five consecutive years

Transition Period: Three years from the commencement of Companies Act, 2014 and rules thereunder applicable for companies which would otherwise had been complying with rotation rules in erstwhile act.

Cooling Period: Five years from the date on which the term of five consecutive years or two terms of five consecutive years comes to an end in case of individual auditor and a firm of auditor respectively.

An Individual (Practicing Chartered Accountant) shall be appointed for a period of five consecutive years which is considered as One Term.

A Firm (Practicing Chartered Accountant Firm) shall be appointed/re-appointed for a period of maximum two terms of five consecutive years and minimum for one term.

Applicability of Rotation

Rotation is applicable to a listed company and following classes of companies excluding OPC and small companies:-

  1. All unlisted companies having paid-up share capital of rupees ten crore or more;
  2. All private companies having paid-up share capital of rupees fifty crore or more;
  3. All companies having paid up capital 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.

Re-appointment after ' one term' is only applicable in case of Auditor Firm. The re-appointment in case of individual comes only after the cooling period .

A 'Term' is always means a minimum period of five consecutive years for which an auditor/firm shall be appointed subject to maximum two term for an Auditor Firm.

In case 'Rotation' is already applicable to a company before the commencement of the Act , then the prior period will be taken into consideration while calculating the term of 5/10 years in case of an individual/Auditor firm is appointed as the case may be .(Section 139-2 read with Rule 6 of the Cos-Audit rule 2014)

For example:

An auditor firm is appointed in a company which comes under rotation of auditor (as per companies Act, 2013) for the Financial Year, 2012-13. On commencement of Companies Act, 2013 the company appoint the auditor firm for a period of Five years effective from Financial Year, 2014-15. Now the term of the auditor firm term comes to an end at the end of Financial Year, 2018-19 The auditor firm can be appointed for a maximum period of 3 years because as per example provided under the above mentioned rule while calculating the maximum number of years for which an auditor firm can be appointed/reappointed the no. of years for which the auditor firm is appointed prior to commencement of Companies Act, 2013 should be taken into consideration.

In this case the auditor is re-appointed for a period of 3 consecutive years instead of 5 consecutive years as mentioned u/s 139.

IIn case a company which crossed the threshold limit after commencement of Companies Act, 2013, transition period is not applicable to them and the example of rotation is also not applicable as well. In such case the rotation will be applicable from the date of crossing the threshold limit. So, if rotation was not applicable before the commencement of the act, the tenure /period will be reckoned from the FY when the company cross the threshold of rotation applicability .

For Example:

An auditor firm is appointed in a public company since 2010-11 and still continuing . The paidup share capital of the company crossed Rs 10 cr during the FY 2018-19, then the term of 5 year/10 year as the case may be shall be counted /applicable from FY 2018-19 and the prior period tenure shall not be counted for the purpose of rotation.


Published by

Prashant Panda
(Company Secretary Cum Head-Legal)
Category Corporate Law   Report

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