Section 141: eligibility, qualifications and disqualifications of auditors

Introduction

Section 141 sets who may audit a company and the independence-based disqualifications. A disqualification arising after appointment causes the auditor to vacate office.

Clause (i) of sub-section (3) was substituted by the Companies (Amendment) Act, 2017, with effect from 9 February 2018. It now disqualifies a person who directly or indirectly renders any section 144 service to the company, its holding company or its subsidiary company.

Key takeaways

Who is eligible

A person is eligible for appointment as auditor of a company only if he is a chartered accountant. A firm whose majority of partners practising in India are so qualified may be appointed by its firm name.

Where a firm, including a limited liability partnership, is appointed, only the partners who are chartered accountants are authorised to act and sign on behalf of the firm.

• India Code — consolidated Companies Act, 2013, section 141
• Gazette of India — Companies Act, 2013 as enacted (No. 18 of 2013), section 141
• eGazette — MCA notification S.O. 902(E), 26 March 2014 - listed provisions in force from 1 April 2014
• eGazette — Companies (Amendment) Act, 2017 (No. 1 of 2018)
• eGazette — MCA notification S.O. 630(E), 9 February 2018 - listed sections of Act 1 of 2018 in force

Disqualifications: structure and relationships

Under section 141(3), the following cannot be appointed: (a) a body corporate other than an LLP registered under the Limited Liability Partnership Act, 2008; (b) an officer or employee of the company; (c) a partner or employee of an officer or employee of the company; (f) a person whose relative is a director or is in the employment of the company as a director or key managerial personnel.

Also disqualified are (e) a person or firm who, directly or indirectly, has a business relationship of a prescribed nature with the company, its subsidiary, its holding or associate company, or a subsidiary of such holding company or associate company; and (h) a person convicted by a court of an offence involving fraud, until ten years have elapsed from the conviction.

Disqualifications: financial interests

Under clause (d), a person who, or whose relative or partner, holds any security of or interest in the company or its subsidiary, its holding or associate company, or a subsidiary of that holding company, is disqualified. A relative may hold security or interest in the company of face value not exceeding one thousand rupees or such sum as may be prescribed.

Clause (d) also disqualifies a person who, or whose relative or partner, is indebted to any of those companies in excess of the prescribed amount, or has given a guarantee or provided security for a third person’s indebtedness to them for the prescribed amount.

Audit limits, services and vacation of office

Clause (g) disqualifies a person in full-time employment elsewhere, and a person or a partner of a firm holding appointment as auditor of more than twenty companies at the date of appointment or re-appointment. Clause (i) disqualifies a person who, directly or indirectly, renders any service referred to in section 144 to the company, its holding company or its subsidiary company, with “directly or indirectly” having the meaning in the Explanation to section 144.

An auditor who incurs any disqualification after appointment must vacate office, and the vacancy is treated as a casual vacancy in the office of auditor.

Practical preparation

Obtain the auditor’s certificate on section 141 criteria under section 139(1); check CA status of the individual or of the firm’s practising partners; collect declarations on securities, debts and guarantees of the auditor, relatives and partners against the prescribed limits; check relatives among directors and KMP; check prescribed business relationships and section 144 services across the group; count existing audit appointments; re-check during the term and treat any new disqualification as a casual vacancy.

Practical checklist

Glossary

Chartered accountant

Under section 2(17), a chartered accountant as defined in the Chartered Accountants Act, 1949 who holds a valid certificate of practice under section 6(1) of that Act.

Relative

A relative as defined in section 2(77); relatives’ interests are relevant to clauses (d) and (f).

Casual vacancy

The vacancy deemed to arise under section 141(4) when an auditor becomes disqualified after appointment.

Frequently asked questions