Qualifications and Disqualifications of Auditor of the Company

The qualifications and disqualifications of auditor provided in the section are the same, be it a private limited company, a public limited company, a Government company, or a company licensed under section 8 incorporated for charitable purposes. The main purpose of this section is to ensure that only the qualifications person possessing the requisite knowledge and technical skill acts as the auditor of a company so that he may discharge his duties effectively. The auditor, it must be emphasized, should be independent in carrying out his work so that he is able to give an unbiased opinion based on an objective assessment of the facts. If the auditor is to maintain his independence, he should have no interest, financial or otherwise and whether directly or indirectly, in the company and or its management. The independence, however, does not mean that the auditor should be hostile and maintain a suspicious attitude towards the management of the company.

Independence of Audit

The need for independence audit cannot be over-emphasized. As pointed out by CAREY IN HIS PROFESSIONAL ETHICS OF PUBLIC ACCOUNTING: “Independence is the keystone in the structure of the accounting profession. Clearly there would be no great store by the certified Accountant’s opinion or certificate if they [users of his published reports] were not confident of his independence of judgment as well as his technical competence. The basic difference between privately employed accountants and professional practitioners is in their responsibilities, moral or legal to the corporation or the public, and in the extent to which their relationship may tend to influence their judgment. In the last analysis, therefore, it is his independence which is the certified public company accountants economic excuse for existence”. As the American Institute of Accountants in their Code of Auditing Standards put it: “Independence in the last analysis bespeaks an honest disinterestedness on the part of the auditor in the formulation and expression of his opinion, which means unbiased judgment and objective consideration of facts as the determination of that opinion. If the auditor is to maintain independence, he should have no financial interest whatever direct or indirect, with the company or its management, during the period of his audit work. As the commission expressed in the case that the independence tends to assure the objective and impartial consideration which is needed for the fair solution of the complex and often controversial matters that arise in the ordinary course of audit work. On the other hand, bias due to the pressure of an entangling affiliation or interest, inconsistent with the professional relations of accountant and client, may cause loss of objectivity and impartiality and tends to cast doubt upon the reliability and fairness of the accountant’s opinion. In actual practice, an auditor will be considered independent only if he avoids any relationship which might arouse the suspicion that such relationship had prevented an impartial attitude of mind. An auditor should not only be free from impropriety but also from the appearance. But independence does not mean that the auditor should assume an attitude of hostility and proceed like a prosecutor. It only points to the need for his functioning in a fair and impartial manner with a sense of obligation not only to the management and those immediately concerned or interested in the one person company’s business but also to those prospectively interested to become shareholders or creditors. Both the code of ethics adopted by the American Institute of Accountants and the regulations of the Securities and Exchange Commission enjoin that for securing the independence of the auditor, the appointment of relatives of the promoter, underwriter, voting trustee, director, officer or employees should be avoided.

Auditor’s qualifications

A person, who is a chartered accountant within the meaning of the Chartered Accountants Act, 1949 and holds a certificate of practice, or a partnership firm/ limited liability partnership where a majority of the partners who are Chartered Accountants holding certificate of practice and practicing in India, may be appointed as an auditor of a company. In the latter case, the appointment as an auditor may be made in the firm name including a limited liability partnership. However, only those partners who are chartered accountants are authorized to act and sign. This position is in sync with the recognition of the need for multidisciplinary firms.

Appointment of a proprietary concern must be in the proprietor’s name

Where only one person is a proprietor of the firm, it cannot be regarded as a partnership firm which may be properly appointed as the auditor of a company. It follows that a company must appoint the proprietor of the ‘so-called’ firm, by his name in his individual capacity, as its auditor, and the auditor’s report will have to be signed by the proprietor himself in his own name.

Appointment of an erstwhile director as auditor

According to section 141 (3) (b) a person who is an officer or employee of the company at the time of appointment as auditor alone is disqualified for such appointment. There seems to be nothing in the said clause to suggest that a person who has been an officer or employee of the company prior to appointment as an auditor is disqualified for appointment. Of course, a person who attracts any of the qualifications subsequent to appointment as auditor would be deemed to have vacated his office as an auditor. Therefore, there is no bar to an erstwhile director being appointed as auditor provided it would be possible to conduct the audit in an independent and objective manner.

Can an auditor charge monthly fees?

With regard to charging of monthly fees by the statutory auditor of the company for other services on relationship basis, there is no specific prohibition in the Chartered Accountants Act, 1949, the Regulations, and the relevant pronouncements made by the Institute in this regard. Inspite of such lack of express prohibition, the auditor must ensure that acceptance of the said assignment does not impair his independence to function as the auditor. This may be decided by the auditor keeping in view a number of factors, the most important being, the nature of contract whether the assignment, in fact, is nothing but in the nature of employment including part-time employment. If this be the case, the statutory auditor should not accept the said assignment. In other words, the auditor will have to decide, keeping in view the facts ad circumstances of the case, whether he should or should not accept this assignment so that his independence is not impaired.

A statutory auditor cannot be appointed as internal auditor

The statutory auditor cannot function as internal auditor, as an internal auditor is in the position of an employee under the management. The internal auditor is appointed by the management and, hence, is in the position of an employee, whereas the statutory auditor is appointed by the company, and the auditor is required to perform the duties enjoined on him under the Companies Act, 2013.

Applicability of qualifications when firm is appointed as auditor

Sub-section (1) of section 141 provides that a firm whereof a majority of partners are qualifications chartered accountant holding certificate of practice may be appointed by its firm name as the auditor of a company; and in that case any partner so practicing may act in the name of the firm. It is, however, not clarified whether the restriction on holding the security of the company applies to the firm which is appointed as auditor or to all partners of the firm and their relatives or to the particular partner who in respect of that company act in the firm name and the relatives of such partner. The section provides that the person holding security of a company or its subsidiary or holding company or fellow subsidiary/ associate/ joint venture cannot be appointed as an auditor of the company. The term “person” has not been defined in this section or elsewhere in the Companies Act. A partnership firm is or association or body of individuals whether incorporated or not. A partnership firm is not a person and the shares cannot be registered in the register of member in the firm’s name, the shares which may be owned by the firm have to registered in the name of any partner of the firm, though not beneficially held exclusively by him; that is to say beneficially held jointly with other partners of the firm.

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