Auditor Resignation – Legal Provisions and Challenges - MMJC

Introduction

As per the provisions of the Companies Act 2013 (the Act), the shareholders have authority to appoint a statutory auditor to verify the correctness of the financial statements prepared and presented by the company. This auditor is required to review the financial statements and present to the shareholders, a report thereon. Normally, the auditor is appointed by the shareholders at a general meeting, exception being appointment of first auditor after incorporation and appointment of auditor in casual vacancy. In both these cases, the statutory auditor is appointed by the board.

However, in case of casual vacancy, if such vacancy is caused by the resignation of the auditor, then the appointment of auditor made by the board to fill the casual vacancy should be approved by the shareholders within 3 months from recommendation of the board. In this article, we shall discuss about some complications that may arise in complying with this requirement of shareholder approval.

Question arising out of compliance of provision.

[1]Section 139(8) says that, if a casual vacancy of statutory auditor is created, then such vacancy should be filled by the board of the company within 30 days and such auditor appointed in casual vacancy should hold office till the next annual general meeting (AGM). But if such vacancy is created by resignation of existing auditor, then the appointment made by the board should be approved by shareholders at a general meeting within 3 months from the date of recommendation of the board.

Given this provision, there arises a question that, if statutory auditor of any company resigns in the month of July or August, then will such company be required to conduct an extra ordinary general meeting (EOGM) before AGM for approval of appointment of statutory auditor made by the board? Or it can be obtained at the AGM as well if the AGM is proposed to be held within 3 months from the recommendation of the board.

Factors to be considered while finding an answer.

Answer to this question will depend upon multiple factors like,

• Time of resignation
• Status of company whether listed or unlisted,
• Whether resigning auditor has signed the balance sheet or not etc.

Before considering these factors, we must take a look at the language of section 139(8). This provision says that, the shareholder approval should be obtained at a general meeting. It does not clarify as to AGM or EOGM. Therefore, approval can be obtained at both types of meetings depending upon the above mentioned conditions. Now Let’s look at all these factors one by one.

• Time of resignation

Time of resignation of auditor is very crucial for determining the need of EOGM. For example,, if the auditor has resigned in the month of April and the AGM of the company is scheduled in September, then, the board is required to fill the vacancy within 30 days and obtain shareholder approval within 3 months from board’s recommendation that is, latest by August. In such a case, company will have to call EOGM before AGM otherwise the timelines will be exceeded resulting in to non-compliance. Whereas, if the auditor resigns in months of July or August and AGM is scheduled in September, then there may be o need for EOGM as shareholder approval can be obtained at AGM as it is being conducted within 3 months.

• Signing of balance sheet & listed/unlisted status of the company.

Both these points, that is, the fact that the auditor has signed the balance sheet before resigning or not and that the company is listed or subsidiary of listed company or a normal unlisted company? Are of great importance and are closely linked to each other. We can analyze these 2 factors in multiple permutations and combinations.

• Auditor of unlisted public company resigns after signing the balance sheet for previous financial year.

The main purpose of appointing a statutory auditor is that he should certify the correctness of the financial status represented by the company through its balance sheet. Signing of balance sheet by auditor indicates that he has verified its contents and he certifies its correctness. Further, there is no requirement under the Act which says that at any given point in time, a company should have a statutory auditor. Therefore, if the auditor has resigned after signing the balance sheet, the board has appointed new auditor in casual vacancy and AGM of the company is scheduled within 3 months from bord filling the vacancy, then shareholder approval can be taken at AGM.

However, one question that may need consideration in this regard is that, which auditor, original or one appointed in casual vacancy, should be present at the AGM to answer the shareholder queries. Logically speaking, the auditor who has signed the balance sheet will be in a better position to answer the queries.

• If auditor of listed company or its material subsidiary resigns after signing the balance sheet for previous financial year.

As far as listed companies and their material subsidiaries are concerned, it is not about signing the balance sheet only. They are required to submit to the stock exchange, quarterly financial statements accompanied with limited review report to be given by the statutory auditor of the company. In such a case, if the auditor resigns in midst of the June to September quarter, then it is not just about obtaining shareholder approval at EOGM or AGM only. It is also about giving the limited review report for first and second quarter of the financial year.

In this regard, a [2]SEBI circular dated 18^th October 2019 may be made. As per this circular, if the auditor resigns from the company within 45 days from end of quarter, then he has to give report for that quarter but if he resigns after 45 days from the end of quarter, then he has to give report for next quarter as well. That means, if the auditor resigns before 14^th August then he has to give report for April to June quarter only. But if he resigns after 14^th August, then he has to give report for July to September as well.

In any case, since the auditor has resigned after first July, his casual vacancy can be filled by board and shareholder approval can be obtained at AGM to be conducted up to 30^th September.

• If auditor of unlisted company resigns without signing the balance sheet for previous financial year

The auditor is appointed by the shareholders to assure them about the correctness of the financial statements. If such auditor has resigned without signing the balance sheet, then shareholders will have to appoint new auditor to certify the correctness of accounts. Therefore, in such case, board will have to appoint auditor in casual vacancy and obtain shareholder approval will have to be obtained at an EOGM. Only then will the new auditor be authorized to sign the balance sheet. the AGM of the company can be conducted only after the financial statements are ready and signed by the auditor. Therefore, company will have to first obtain shareholder approval at EOGM for appointment of auditor in casual vacancy, then he will sign the balance sheet and then that balance sheet will be adopted by shareholders at the AGM.

• Auditor of listed company or its material subsidiary resigns without signing the balance sheet of preceding financial year

As far as signing of annual financial statements of a listed company or its material subsidiary is concerned, the above mentioned SEBI circular states that, if the auditor has given limited review report for 3 quarters of a financial year, then he has to give report for forth quarter as well as sign the annual financial statements. Therefore, there cannot arise a situation wherein the auditor has not signed the balance sheet of a listed company or its material subsidiary unless he has resigned in the October to December quarter. In this case, the company will have to call an EOGM for obtaining shareholder approval for appointment done in casual vacancy, as approval will have to be taken in 3 months and AGM will be  due in next calendar year.

Conclusion.

From the above discussion, we may say that, if the auditor has signed the balance sheet before resigning from the company, then board can appoint a new auditor in casual vacancy and shareholder approval can be obtained at AGM if the same is due within 3 months from date of board’s recommendation. But, if the same is not to be held within 3 months, then the approval will have to be obtained at EOGM. Secondly, if the balance sheet is not signed by the auditor before resigning, then the AGM cannot be conducted till the time the balance sheet is audited and signed by the auditor. Hence in such circumstance, the company will have to acquire shareholder approval at an EOGM and then proceed with audit and ones the audit is done, then it conduct the AGM and adopt the audited financial statements.

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[1] (8) Any casual vacancy in the office of an auditor shall—

(i) in the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within thirty days, but if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting;

[2] https://www.sebi.gov.in/web/?file=/sebi_data/attachdocs/oct-2019/1571395257061.pdf#page=1&zoom=page-width,-15,842