The Hindu Business Line : Appointment of auditor

The auditor should verify that the removal of the previous auditor is in accordance with the provisions of law, particularly with reference to the procedures to be followed.

Auditor's appointment is covered in Sections 224 and 225 of the Companies Act. The Code of Conduct requires an auditor to ensure that his appointment is in order and that it is all right for him to accept the assignment.

The auditor should ensure that the appointment is proper and in accordance with Sections 224 and 225, failing which, he would be held guilty of professional misconduct.

The auditor should verify that the removal of the previous auditor is in accordance with the provisions of law, particularly with reference to the procedures to be followed and the permissions to be obtained, notices being issued, resolutions passed, and so on.

Verification of the minutes of meetings of the board of directors and of the members of the company would be essential.

Communication of appointment: The company should communicate to the auditor of his appointment within seven days of his appointment as auditor of the company, enclosing a copy of the resolution passed at the meeting of shareholders or of the board of directors. Though there is no legal requirement, courtesy demands that the auditor acknowledges the receipt of the letter of appointment.

Communication with outgoing auditor: Unless there is a strong reason, the auditor is not removed in the normal course of business. In broad interests of the profession and as a matter of professional etiquette, the auditor is required to communicate with the outgoing auditor to ascertain if there are any professional reasons as to why he should not accept the appointment. SAccepting any assignment (not only audits) previously held by a member of the ICAI without first communicating with him would render the new incumbent liable for professional misconduct. There are several case laws on this matter; their burden is that the communication must be sent only by registered post or by hand delivery against a valid acknowledgement.

The incoming auditor should have enough proof that the communication has reached the outgoing auditor. Merely saying that it was dispatched to the address of the outgoing auditor would not suffice. This clause is inserted to safeguard the interests of the profession at large. The outgoing auditor would be in a position to advise the incoming auditor if he should exercise caution during the course of work, though it is not mandatory. It is obligatory on the part of the outgoing auditor to reply within a reasonable time to the communication sent in by the incoming auditor.

Acceptance: Appointment of an auditor is a contract as much as any other contract. Offer, acceptance, communication of acceptance, etc., are essential for the appointment of the auditor also. The appointment is not complete until the auditor communicates his acceptance to the company.

The auditor should communicate his acceptance or otherwise within 30 days from the date of receipt of communication of his appointment from the company.

Communication to RoC: Filing of Form 23B with the Registrar of Companies (RoC) is an additional procedure. It is in addition to the communication of acceptance to be sent by the auditor to the company. Communication to the RoC does not absolve the auditor of his responsibility to communicate to the company of his acceptance or declining the appointment.

Communication to the company is under the Contract Act, whereas filing of Form 23B is a requirement of the Companies Act.

Declining appointment as an auditor: An auditor can as well choose to decline the appointment based on circumstances, professional commitments, reply of the outgoing auditor, etc.

The fact that he consented earlier to the appointment does not bind him to take up the audit. Passing a resolution is the offer made by the company. Offer is communicated to the auditor by the company. Unless the offer is accepted and communicated to the company, the contract is not binding and appointment is incomplete.

Consequently, declining of appointment by an auditor does not result in a casual vacancy.

It leads to a situation where it is deemed that no auditor is appointed at the meeting and Section 224(3) would apply.