Casual vacancy of AuditoR
A vacancy in the office of the auditor of the company before the term has expired is a casual vacancy. The term has not been defined in the Act. But there are several circumstances in which the casual vacancy arises. The term used may be ‘casual’ but has serious implications.
- Death of the auditor
- Resignation of the auditor
- Contracting disqualifications under Section 141(3)
- Incapacity to contract
- Ceasing to be a member of ICAI
- Change in status of the auditor
1. Death of the auditor:
The law stipulates that only an individual or a firm of chartered accountants can be appointed as auditors of a company. If an individual is appointed, his death would give rise to a casual vacancy. But if a firm is appointed, death of one or more of the partners does not give rise to a casual vacancy, except under the following two circumstances:
a) There exists a clause in the partnership deed that death of a partner dissolves the firm or conversely there is no clause in the deed that death of a partner does not dissolve the firm.
b) Everyone dies at a time except one partner
Everyone dies at a time except one partner, the partnership firm does not exist anymore. Therefore, the firm continuing as auditor of the company does not arise.
There is a change in the status from that of a firm to an individual.
The time of death of the auditor is crucial to decide if it is a casual vacancy. A contract is not complete unless the offer is accepted, and such acceptance is communicated to the proposer. The appointment of auditor is, therefore, complete only when the auditor communicates his acceptance.
Passing a resolution at the meeting is just one of the parts of appointing an auditor. Such a resolution is only an offer. It is not appointment by itself. The company communicates to the auditor by way of a letter his appointment and the auditor communicates his acceptance or otherwise.
If the auditor dies in the meantime, (without communicating his acceptance) the appointment is not complete. Thus, it is not death of the auditor of the company. There is no casual vacancy. The situation is that it is deemed that no auditor has been appointed and provisions of Section 139 (1) and 141(3) become operative.
For an appointment to be complete, the communication of acceptance should reach the company.
The answer for a situation where the acceptance is posted and the auditor dies before the letter reaches the company is determined by the Contract Act. To constitute a casual vacancy by death of the auditor, the appointment should be valid and complete in all respects
2. Resignation of the auditor:
The auditor may resign as an auditor of the company for any reason. Only the shareholders can fill such a vacancy. This provision is to uphold the independence of the auditor.
The shareholders should know the reason of resignation of the auditor. It is possible that the board of directors is not cooperating with him or that the board might create a situation that he is not in a position to continue as an auditor. Perhaps he comes across a situation of a misstatement in financial statements and does not want to take the risk.
It is also possible that he is resigning to take up a bigger audit or intends to become a director of the company or for that matter he is retiring from practice.
Whatever the reason, it is only the shareholders who can fill the vacancy caused by the resignation of an auditor.
3. Contracting disqualifications under Section 141(3):
These disqualifications are laid down to uphold the independence of the auditor. If, during the tenure of his audit, the auditor contracts any disqualifications under this Section, he cannot continue as the auditor of that company. He is deemed to have vacated his position, and a casual vacancy therefore arises.
4. Incapacity to contract:
Certain classes of persons are not competent to enter into a contract under the Indian Contract Act, 1872 such as an un-discharged insolvent or a lunatic or a person of unsound mind.
If an auditor becomes incapacitated to enter into a contract, he cannot continue as the auditor of the company, giving rise to a casual vacancy.
5. Ceasing to be a member of ICAI:
Name of a member can be removed from the register of members of the Institute of Chartered Accountants of India for many reasons, from the simple non-payment of membership fees to disciplinary proceedings. Upon such removal he becomes disqualified to be the auditor of a company. Even if the certificate of practice is suspended for a period, he ceases to be in practice and cannot continue as the auditor of a company. Such circumstances lead to a casual vacancy.
In addition to the above a person cannot be the auditor if he is convicted of an offence involving moral turpitude, in which case, his name will be removed from the register of members of ICAI for a certain period.
6. Change in status of the auditor
Only an individual or a firm of Chartered Accountants can be appointed as an auditor of a Company. Where an individual is appointed as an auditor and he converts the individual practice as a partnership, he ceases to be practising in his individual capacity. In such a situation, the proprietary practice does not exist anymore. Therefore, a casual vacancy arises and the board has to fill the vacancy. The board might as well appoint the newly constituted firm as the auditor in the place of the individual. Subsequently, even if a new partner is admitted, there is merely a change in the constitution of the firm and no change in the status. No casual vacancy arises, even if no change in auditor is contemplated.
Conversely, if a firm of two partners is appointed as auditors of the company and if one of them ceases to be a partner, the status gets changed to an individual, giving rise to a casual vacancy, requiring an appointment by the board of directors.
For example: Mr Rao is appointed as auditor of a company at the AGM held in August 20XX. His daughter passes the CA Final examination held in November, 20XX. Mr Rao admits her as a partner in his existing practice. His son qualifies in May 20XX and is admitted as a partner in August 20XX.
Once he converts his proprietary practice into a partnership by admitting his daughter, he ceases to practise in his individual name. Therefore, the firm of Chartered Accountants of father and daughter should be appointed in the vacancy caused by his ceasing to practise in his individual name. Once the firm is appointed, admission of the son as a partner is merely a change in the constitution of the firm. There would be no casual vacancy.
Filling up a casual vacancy
The board of directors is empowered by Section 139 (8) to appoint an auditor in case of a casual vacancy except the vacancy caused by resignation of the auditor, in which case, the power vests only with the shareholders.
The law is silent on the time frame and the mode for such an appointment of auditor in a casual vacancy. Therefore, the board should take decisions in such a way as not to hamper the audit procedures and ensure timely compliance with legal proceedings.
The following questions arise:
Can the board delegate the authority to a particular director?
Can the auditor be appointed by the audit committee?
Can the appointment done by way of a circular resolution?
Answers to all the three questions seem to be “Yes”.
The law does not specify that such a casual vacancy should be filled by the board of directors at a meeting of the board. Section 179 stipulates circumstances where decisions are to be taken only at a meeting of the board or of a committee. The list does not include appointment of auditor in a casual vacancy. It therefore implies that such an appointment need not be made only at a meeting of the board of directors.
Therefore, the board may delegate the authority to a particular director or to a committee of directors. The audit committee, which is formed to attend to the audit requirements, might as well appoint the auditor of the company, under the signature of a director, who is a member thereof.
Alternatively, the appointment can also be made by a circular resolution to overcome the time constraints and to provide that much extra time to the auditor.
Where a company is required to constitute an Audit Committee under section 177 of the Companies Act, 2013 all appointments, including the filling of a casual vacancy of an auditor shall be made after taking into account the recommendations of such committee.
