It is mandatory for every company registered under the Companies Act, to get its accounts audited by the statutory auditor and present it before the stakeholders every year. An audit is an important activity for every business and the auditor must present his views in an unbiased way.
The principle of Audit Rotation implies periodic breaks to audit engagements and is imposed to avoid long-term relationships between an auditor and the client. Audit breaks/rotation is a major provision to enhance the Audit quality and maintain the trust of various stakeholders in the company.
Section 139(2) of the Companies Act, 2013 deals with the mandatory auditor/audit firm rotation principle and provides for the rules and regulations in this regard.
Auditor Rotation Applicability
Section 139(2) of the Companies Act, 2013 provides for mandatory rotation of auditor or audit firm by listed and certain class or classes of companies. The Section specifies that no listed company or a company belonging to such class or classes of companies as specified shall appoint or reappoint
- An individual as auditor for a more than one term of five consecutive years and
- An audit firm as auditor for more than two terms of five consecutive years.
Therefore rotation of auditor is applicable to all listed companies and such other classes of companies as may be prescribed. The list of “such other class of Companies” is provided in Rule 5 of Companies (Audit and Auditors) Rules, 2014. Except for small companies and one-person companies, rotation of auditors is applicable to the following companies:
| Sr. No. | Category of company | Threshold limit |
| 1. | Unlisted public companies | Having paid-up capital of Rs. 10 crores or more |
| 2. | Private limited companies | Having paid-up capital of Rs. 50 crores or more |
| 3 | Any company having paid-up capital below threshold limits as specified under points (1) and (2) above but having public borrowings from a financial institution, banks, or public deposits | Rs. 50 crore or more |
Therefore from the above explanation, it is clear than Auditor Rotation is not applicable to the following companies:
- One Person Company
- Small Company
- Unlisted public companies having paid-up capital less than Rs. 10 crore or borrowings less than Rs 50 crore
- Private Limited companies having paid-up capital less than Rs. 50 crore or borrowings less than Rs 50 crore
Can the Outgoing Auditor be Reappointed in the same company after the completion of his term of the audit?
First Proviso to Section 139(2) provides that after the completion of the audit term (5 consecutive years or 10 consecutive years as the case may be), the outgoing auditor shall not be eligible for re-appointment in the same company:
| In the case of individual Auditor | For a period of 5 years from the completion his term |
| In the case of an Audit Firm | For a period of 5 years from the completion of his term |
Therefore post completion of the term of audit, a cooling period of 5 years is provided to be eligible for reappointment as an auditor in the same company.
Provision related to Common Partner in Audit Firm
Second Proviso to Section 139(2) of the Companies Act, 2013 provides that if Audit Firms i.e. incoming audit firm and outgoing audit firm whose tenure has expired in a company immediately preceding the financial year, are having common partner or partners, then such incoming audit firm is not eligible to get appointed as auditor of the same company for a period of 5 years.
Manner of Rotation of Auditors by the companies on expiry of their term
- Recommendation for an appointment:
The Audit Committee, where there is one of the Board shall consider the matter of rotation of auditors and shall recommend his appointment at the annual general meeting of the company.
- Prior Period must be taken into consideration:
While calculating the consecutive 5 years or 10 years, the prior period before commencement of the Act, served as Auditor (whether individual or firm) shall be taken into account.
- Not eligible for appointment if belongs to the same Network
The incoming Auditor shall not be eligible for appointment if he or any partner of the firm is associated with the outgoing auditor or auditor firm under the “same network of audit firms.”
Rule 6(3) of the Companies (Audit and Auditors) Rules, 2014, provides that while calculating the period of five consecutive years or 10 consecutive years as the case may be the period for which an individual or firm has held office as auditor prior to the commencement of the Act shall be taken into account. The following illustration will help to understand how an appointment shall be made in the first AGM after the commencement of this Act, i.e., 1st April 2014
Illustration 1 (For individual auditor) :
| Number of consecutive years for which an individual auditor has been functioning as an auditor in the same company [in the first AGM held after the commencement of provisions of Section 139(2)] | Maximum number of consecutive years for which he may be appointed in the same company (including the transitional period) | The aggregate period which the auditor would complete in the same company in view of columns I and II |
| I | II | III |
| 5 years (or more than 5 years) | 3 years | 8 years or more |
| 4 years | 3 years | 7 years |
| 3 years | 3 years | 6 years |
| 2 years | 3 years | 5 years |
| 1 year | 4 years | 5 years |
Illustration 2 (in case of Audit Firm)
| Number of consecutive years for which an individual auditor has been functioning as an auditor in the same company [in the first AGM held after the commencement of provisions of Section 139(2)] | Maximum number of consecutive years for which he may be appointed in the same company (including the transitional period) | The aggregate period which the auditor would complete in the same company in view of columns I and II |
| I | II | III |
| 10 years (or more than 10 years) | 3 years | 13 years or more |
| 9 years | 3 years | 12 years |
| 8 years | 3 years | 11 years |
| 7 years | 3 years | 10 years |
| 6 year | 4 years | 10 years |
| 5 years | 5 years | 10 years |
| 4 years | 6 years | 10 years |
| 3 years | 7 years | 10 years |
| 2 years | 8 years | 10 years |
| 1 year | 9 years | 10 years |
What is the same network of Audit Firms?
Here the same network includes the firms operating or functioning, hitherto or in the future, under
1. Same brand name or
2. Same trade name or
3. It has a common control.
As per the guidelines issued by the Institute of Chartered Accountants of India, for determining whether the firms or individual auditors are operating or working under the same network, the following factors must be considered:
- Ownership or control or management of the firms
- Sharing of professional resources amongst the firms
- Quality control processes among the firms
- Co-operation amongst the Audit Firms.
Other important provisions related to rotation
- Change in Audit Firm by Partner who certifies the financial statements of the company
Explanation to Rule 6 provides that a firm shall not be eligible for appointment if a partner of an existing firm (outgoing firm), who certifies the financial statements of the company, retires from the said firm and joins another firm of Chartered Accountants. Such a firm shall be ineligible for an appointment for a period of 5 years.
- Consecutive 5 years
Consecutive years shall mean all the preceding financial years for which the individual auditor has been the auditor until there has been a break by five years or more.
- Rotation in case the company has appointed joint Auditors
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.
- Term of Audit amongst Partners
The members of the company may resolve for:
a) in the audit firm appointed by it, the auditing partner and his team to be rotated at such intervals as may be resolved by members; or
(b) the audit shall be conducted by more than one auditor.
Auditors’ right to resignation and the company’s right to remove an auditor
The rights of the company to remove the auditor or the right of the auditor to resign before the expiry of the term are retained. Also, the company can remove the auditor before the expiry of the term.
Applicability of Auditor rotation in case of a private limited company
Rule 5 of Companies (Audit and Auditors) Rules, 2014 provides that, the Rotation of Auditor is applicable in the case of private limited companies if,
- The paid-up share capital of the company is Rs. 50 crore or more; or
- Has public borrowings from financial institutions, banks, or public deposits of Rs. 50 crore or more.
The companies below the threshold limits as mentioned above, small companies, and One Person Companies are not required to follow the provisions related to the rotation of Auditor or Audit Firm. The Auditor in such companies can be an auditor for any number of years.