Appointment of Branch Auditor – Ensuring Compliance with Provisions of Companies act, 2013 - MMJC

Introduction.

Since the inception of the Companies Act 2013 (the Act), the obligations of statutory auditor have increased. The Act provides for appointment, re-appointment, filing up of casual vacancy and removal of statutory auditor of the company. Suppose a company has also appointed a branch auditor to do branch audit of its various branches then whether this appointment shall also be governed by the provisions of the Act as they related to appointment, re-appointment, filing up of casual vacancy and removal of statutory auditor?

In this article, we shall try to understand as to who can audit the branch accounts of the company and does provisions relating to appointment of statutory auditor apply to appointment of branch auditor as well?

Who can audit the accounts of the branch?

The provisions relating to audit of branch accounts of a company are specified under sub-section (8) of section 143 of the Act[1]. As per provision of this sub-section branch audit may be undertaken by the statutory auditor appointed by the company to do the statutory audit or by any other person qualified to do audit of the company or if the branch office of the company is situated outside India then accounts of the branch may be audited either by the company’s auditor or by an accountant or by other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country.

That means, if the person other than the statutory auditor of the company is to be appointed as branch auditor, then in case the branch is located within India, he should be a person who is qualified to do statutory audit of the company (i.e. chartered accountant or a firm of chartered accountants)..

Applicability of provisions relating to appointment of statutory auditor to branch auditor.

Appointment of statutory auditor is done by the members of the company at the annual general meeting unless in case of filling up of casual vacancy. Therefore, there arises the question that is the branch auditor also appointed by shareholders? The answer to this question depends on whether the branch in question is in India or outside India.

• Auditor of Indian Branch: As specified above,  

If the branch office of a company is located in India, then the person qualified to be appointed as statutory auditor of a company should be appointed as branch auditor of the company. Further as per section 139 of the Act auditor should be appointed by shareholders through an ordinary resolution passed at annual general meeting. Hence it can be inferred that at the time of appointment of statutory auditor of the company if he is also to be appointed as branch auditor of the company for a branch(es) located in India,  then it shall be accordingly mentioned in the resolution for appointment of statutory auditor of the company.   

• Auditor of foreign branch auditor.

The same sub-section 8 of section 143, that talks about appointment of Indian branch auditor, describes about appointment of foreign branch auditor. Therefore, its prima facie appears that the foreign branch auditor also must be appointed by shareholders as provided in section 139. But when observed carefully, this is not the case. Section 143 (8) reads as under,

“(8) Where a company has a branch office, the accounts of that office shall be audited either by the auditor appointed for the company (herein referred to as the company’s auditor) under this Act or by any other person qualified for appointment as an auditor of the company under this Act and appointed as such under section 139, or where the branch office is situated in a country outside India, the accounts of the branch office shall be audited either by the company’s auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country and the duties and powers of the company’s auditor with reference to the audit of the branch and the branch auditor, if any, shall be such as may be prescribed:”

If observed carefully, the conditions relating to appointment of branch auditor of Indian branch and foreign branch are separated with a help of ‘comma’. The first part of sub-section says that branch auditor of Indian branch should be appointed as per provisions of section 139. Thereafter, there is a ‘comma’ and then appointment of foreign branch auditor is described. In websters dictionary ‘comma’ means a short clause in a sentence; that which is struck off or cut off from coptein”. a mark of punctuation (,) used to indicate a slight separation of sentence elements; commas are used to set-off nonrestrictive or parenthetical elements; quotations, items in a series, etc.[2] Therefore, the comma inserted after the words, “section 139” separate the part of sub-section written thereafter.

Therefore, it can be seen that in case of foreign branch auditor, there is no requirement of referring to section 139. -section (8) of section 143  of the Act states that the qualification of foreign branch auditor should be as per the laws of land where the branch is located, or by an accountant or by statutory auditor of the company to whom the branch outside India belongs.

Sub- section (8) of section 143 of the Act is silent about the process of appointment of auditor of the branch located outside India. Therefore, it is upto discretion of the company whether it wants to take the appointment of foreign branch auditor to shareholders or whether it wants to do the same through a board resolution.

Conclusion.

Punctuation in law plays a crucial role in interpreting a law. Presence of comma in sub-section 8 bifurcates it into two parts (viz. appointment of branch auditor for a company having branch in India and for a company having branch located outside India). By understanding the intricacies of branch auditor appointments, companies can avoid non-compliance, fines, and reputational damage.

[1] “Where a company has a branch office, the accounts of that office shall be audited either by the auditor appointed for the company (hereafter in this section referred to as the company’s auditor) under this Act or by any other person qualified for appointment as an auditor of the company under this Act and appointed as such under section 139, or where the branch office is situated in a country outside India, the accounts of the branch office shall be audited either by the company’s auditor or by an accountant or by other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country and the duties and powers of the company’s auditor with reference to the audit of the branch and the branch auditor, if any, shall be such as may be prescribed :”.

[2] C V Raju vs C Balagopal and ors April 27, 2001, https://indiankanoon.org/doc/87965/