SECTION 224

APPOINTMENT AND REMUNERATION OF AUDITORS

Whether statutory auditor of company can also be its internal auditor

A question has been raised whether a statutory auditor of a company can also be its internal auditor, which has been carefully examined in this Department and its view is as follows:

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 in accordance with the provisions of section 224, and the auditor is required to perform the duties enjoined on him under section 227 and rules/orders issued thereunder. In this connection, reference may also be made to paras 4(A)(vi) and (xi) of the Manufacturing and Other Companies (Auditor's Report) Order, 1975 in accordance with which the statutory auditor has to include in his report under section 227 whether there is adequate internal control procedure commensurate with the size of the company and the nature of its business for the purchase of stores, raw materials including components, plant and machinery, equipment and other assets and in the case of companies having more than Rs.25 lakhs paid-up share capital, whether there is any internal audit system commensurate with the size and nature of business. It is, therefore, obvious that if the statutory auditor of the company is also the internal auditor, it will not be possible or him to give an independent and objective report auditor, it will not be possible or him to give an independent and objective report under section 227, read with para 4(A) of the said Order. As such, in the opinion of this Department, a statutory auditor of a company cannot also be its internal audit

* CIRCULAR NO.29/76(1/176-CL-V), DATED 27.8.1976 AS CORRECTED BY CIRCULAR NO. 5/77(1/76-CL-V), DATED 8.4.1977.

Certificate by auditor given under the proviso to the sub-section - Applicability of sub-sections(1B and (1C)

According to the provisions of section 224(1B) on and from the financial year next following the commencement of the Companies (Amendment) Act, 1974, no company or its board of directors shall appoint or reappoint any person or firm as its auditor if such person or firm is holding appointment of more than the specified number of companies, and according to the provisions of sub-section (1C) a person or firm holding the appointment as auditor of more than the specified number immediately before the commencement of the Amendment Act, shall, within 60 days from such commencement intimate his unwillingness to be reappointed as the auditor from the financial year next following such commencement to the companies of which he or it is not willing to be reappointed as auditor. Further, according to the provisions of the proviso to sub-section(1), the appointment of auditor of a company must be based on a written certificate from the auditor to the effect that the appointment or reappointment, if made, will be in accordance with the limits specified in sub-section (1B). A question has been raised whether when sub-sections (1B) and (1C) speak of the financial year next following the commencement of the Companies (Amendment) Act, 1974 and the proviso to sub-section (1) requires an auditor to give a certificate as aforesaid in respect of appointments which may take place at any time after the commencement of the Amendment Act, the certificate in terms of the said proviso will be feasible, taking the companies whose financial year started before the commencement of the Amendment Act but ends after such commencement and whose audit work is already in the charge of the auditor concerned, into account..

The Department is of the view that this issue is of a transitional nature. The provisions of sub-sections (1B) and (1C) of section 224 become effective with reference to the financial years of the companies commencing after the date of commencement of the Companies (Amendment) Act, 1974, viz., 1.2.1975. It may be that till the commencement of the financial year of such companies, if an auditor has such companies among others, the auditor would be keeping more than 20 audits but the excess number would be restricted only to those companies whose financial years having begun before the commencement of the Amendment Act and after the commencement of the said Act. In other cases, the auditor will be having only 20 audits.

The above view does not result in any conflict with the proviso to sub-section (1) since the auditor is required to give his certificate keeping in view the limit as conceived of by sub-section (1B). The auditor may, thus, issue a certificate that his appointment would be in accordance with sub-section (1B) but while giving such a certificate, the auditor will have to keep in mind that on the beginning of the next financial year of the companies whose current financial year ends after 1.2.1975, the number of company audits with him shall not exceed 20.

* CIRCULAR NO.7/75(35/3/75-CL-III), DATED 7.5.1975

Signing of Form 23B by auditors in firm's name without disclosing identity of signatory - Whether permissible

The Department is of the view that the intimation in token of acceptance or refusal to accept the appointment is only a ministerial act which can be performed by a duly authorised person on behalf of the firm. No doubt, a partner of a firm is authorised under the law to sign any document on behalf of the firm, but even a clerk of the concerned firm can also sign such intimations on behalf of the firm, if he is specially authorised to do so. It is, however, necessary that the identity of person who signs Form 23B, whether he be a partner or a clerk of the firm, must be disclosed as such as it will not be enough if the form is signed only in the firm's name, without disclosing the identity of the signatory since the firm has no locus stand of its own in the eye of law. Further, since Form 23B is a statutory document, it is all the more necessary that a person duly authorised by the concerned firm should be the signatory and his name must be disclosed therein, in addition to the name of the firm. This will help to fix up responsibility on any wrong or false statement made in such a document.

*LETTER NO.7/26/76-IGC, DATED 31.10.1977

Requirement of sending certificate by auditors to Registrar -Whether intimation to Registrar required to be given by auditor under sub-section (1C) should be in any particular form and whether it is to be registered by Registrar and any fee is to be charged

Under sub-section (1C) of section 224, a person or firm holding, immediately before the commencement of the Companies (Amendment) Act, 1974, appointment as the auditor of a number of companies exceeding the specified number shall, within sixty days from such commencement, intimate his or its unwillingness to be reappointed as the auditor from the financial year next following such commencement, to the company or companies of which he or it is not willing to be reappointed as the auditor and shall simultaneously intimate to the Registrar of Companies the names of the companies of which he or it is willing to be reappointed as the auditor. A question has arisen whether the said intimation to the Registrar should be in any particular form and whether it is to be registered by the Registrar and any fee is to be charged thereon.

The said question has been examined and this Department is of the view that the said sub-section does not provide for prescribing any form for furnishing the said intimation to the Registrar. Hence, the intimation can be in the form of a letter addressed to the Registrar and it would not be required to be registered and hence no fee would be required to be paid. Since the intimation would not relate to any one company, it should be kept in a separate folder auditor-wise.

*CIRCULAR NO.20/75[35/3/75-CL-III], DATED 22.9.1975.

Whether intimation by auditor under the sub-section open for inspection under section 610(1)

The intimation sent by an auditor under section 224(1C) is a document/notice sent to the Registrar of Companies within the meaning of section 2(15) and, hence, it is open for inspection under section 610(1).

* LETTER NO.8/10/(224)/76-CL-V, DATED 1.8.1977.

Specified number of audits under Explanation I to sub-sections (1B) and (1C) - Guarantee companies whether to be counted in reckoning the said specified number

A point has been raised as to whether companies limited by guarantee are to be included in reckoning "specified" number of companies within the meaning of Explanation 1 to sub-sections (1B) and 1C). This has been examined and he Department is of the view that such companies as have no share capital are to be excluded from the reckoning.

* LETTER NO.8/12(224)/74-CL-V, DATED 28.9.1974.

Whether branch audits of Indian companies and audit of Indian business accounts of foreign companies are to be included while calculating specified number in terms of Explanation I to sub-sections (1B) and (1C)

A question has been raised as to whether the auditors of the branches of the Indian companies and the audits of the Indian business accounts of the foreign companies which have established places of business in India and are doing business in India are to be taken into account while calculating the specified limit on the number of audits as laid down in Explanation I to sub-section (1C) of section 224. The question has been examined in detail and this Department is of the view that the branch auditor of the Indian companies appointed under section 228 audits the accounts of the particular branch only for which he is appointed and forwards his report to the auditor appointed under section 224 and, hence, he cannot be equated with the company auditor appointed under section 224 who has to report to the annual general meeting on the accounts of the company as a whole including the branches audited by a branch auditor. The words "any part of which" appearing in Explanation II cannot have any reference to branch audit which as noted above does not fit into the context of section 224. The said words relate to the antecedent number and not "companies" insofar as they are of any material significance to the context. Hence, the branch audits are not be included while calculating the specified number of 20 audits.

As regards the audit of the accounts of foreign companies this Department is of the view that foreign companies are outside the scope of section 224 since the definition of the company under section 3 does not include a foreign company. Hence, the audit of the accounts of foreign companies is also not to be included within the specified number of 20 as laid down under Explanation to sub-section (1C) of section 224.

*CIRCULAR NO.21/75[35/3/75-CL-III], DATED 24.9.1975.

Central Government's power to appoint auditors under sub-sejction (3) - Whether exercisable only where auditor is not appointed in annual general meeting

It is only where an auditor is not appointed at an annual general meeting that the Central Government can exercise the powers under section 224(3). According to the provisions of section 224(1), the auditors are appointed for the period beginning from the conclusion of the annual general meeting (in which they are appointed) till the conclusion of the next annual general meeting. The appointment of auditors is made in terms of this period and for any financial year. The auditors shall audit all the accounts of the company which are to be placed in the next annual general meeting. Thus, when the annual general meeting could not be held on 29th June, 1974 the date for which it had been convened or on the adjourned date, the auditors who had audited the company's accounts for the year ended 31st December, 1973, will continue to be the auditors till the conclusion of the next annual general meeting, whenever it may be possible to hold it, and shall be competent to audit all the subsequent accounts which may be placed at such next annual general meeting.

LETTER NO.35/13/74-CL-III, DATED 21.11.1974.