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Customer Care No.


Nuances in Interpretation
of provisions of rotation of
Auditors under the
Companies Act, 2013

It is for the first time, the Companies Act, 2013 (2013 Act)
has brought in the concept of rotation of auditors in order
to strengthen the role of independence of an auditor and
to increase the credibility of the financial statements of a
company. The audit of accounts of a company is a very
important function as the authenticity and correctness
including true and fair view of the accounts are stamped
by the Auditors and thus the independence of an auditor
takes precedence on which the very premise of any audit
is conducted and concluded. It is for this purpose, the
provisions relating to rotation of auditors was included in
the Companies Act, 2013. It is not uncommon to see with
respect to certain provisions of the Act, when introduced,
faces divergent views or becomes a contentious issue. The
provisions relating to rotation of Auditor is no different and
contains certain provisions which are ambiguous. This
article highlights the nuances in interpretation of the
Customer Care
No. 91-11- of rotation of auditor, its

Issue in brief
Presently, most of the companies are concerned about the interpretation of the transitional
provisions relating to rotation of Auditors, as to whether the auditors, who have already been
the auditors of the company for more than one or two terms of five years, as the case may be,
are required to be changed in the Annual General Meeting (AGM) to be held on or before
September 30, 2016 (AGM due date for F.Y.2015-16) or the present auditors can be continued for
one more year, that is, upto AGM to be held on or before September 30, 2017 (AGM for F.Y. 201617). If we analyse and look at the provisions relating to rotation of auditors, defintely confusion
prevails in their appointment due to interpretation of transitional provisions.
Provisions under the Companies Act, 2013 relating to appointment of Auditors
Section 139 of the 2013 Act deals with appointment of auditors. Section 139(1), inter alia,
requires a Company to appoint auditor at the first AGM to hold office from the conclusion of that
AGM till the conclusion of its sixth AGM and thereafter, till the conclusion of every sixth AGM.
Section 139(2) provides for mandatory rotation of the auditors in case of all listed and other
prescribed class of companies. If we see the provisions of rotation of auditors, the appointment
of one term of five consecutive years for an individual as auditor or two terms of five
consecutive years each for a firm as auditor is provided. The third proviso to section 139(2)
provides for a transition period, that is, the companies existing on/before the commencement of
the 2013Care
Act (2013
Act came into existence w.e.f. April 1, 2014), which are required
to comply

Interpretation of the provisions
Pursuant to the provisions of Section 139(2), the issue that arises is whether the transition
period for rotation is to be counted from the date of commencement of the 2013 Act, i.e. April 1,
2014, or from the date of conclusion of AGM held after the commencement of the Companies
Act, 2013, i.e. the AGM held in 2014 usually on or before 30thSeptember, 2014.
If we go through the provisions of the Companies Act, 1956 and the procedure followed for
appointment of the Auditors, it can be seen that the appointment of Auditors of a company has
always been made from one Annual General Meeting to next Annual General Meeting. In other
words, the appointment of auditors was done for a year at a time. Now, the same appointment
procedure is continuing and even under the 2013 Act, the procedure is same except that the
maximum period of appointment of auditor has been capped at block of five years at a time. It is
also a fact that though the Auditors carry out their statutory audit for financial year (April to
March), their appointment has always been done at the AGM and the said Auditor continues to
be the auditor till next AGM and thus the appointment of auditor in no way related to any
particular year or financial year. This intention of the Legislature was also enunciated in the
clarification issued by the Department of Company Affairs in the context of appointment of
auditors under the Companies Act, 1956. Also, in the event if audit for more than one financial
year is to be completed between two AGMs, then also, the appointment of auditor would take
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Customer Care No. 91-11-