Detailed Procedure for Handling Auditor Resignation and Appointment

Managing the resignation of an auditor and the appointment of a new auditor involves precise adherence to the statutory requirements under the Companies Act, 2013 and the Income Tax Act, 1961. This guidance note provides a comprehensive step-by-step procedure, including detailed timelines and precautions to ensure compliance and avoid defaults.

I. Legal Framework and Compliance Requirements

A. Resignation of Auditor

1. Submission of Resignation Letter:

   • Action: The auditor must submit a formal resignation letter to the Board of Directors.
   • Content: The letter should detail the reasons for resignation.
   • Timing: The letter should be submitted immediately upon the decision to resign.

2. Filing Form ADT-3:

   • Responsibility: The outgoing auditor must file Form ADT-3 with the Registrar of Companies (RoC).
   • Deadline: 30 days from the date of resignation.
   • Content: Form ADT-3 should include the reasons for resignation and details of any pending issues or disputes.
   • Verification: The company should follow up to ensure Form ADT-3 is filed and obtain a confirmation receipt.

3. Consequences of Non-Compliance:

   • Penalties: Failure to file Form ADT-3 within the prescribed period can result in penalties of up to Rs. 10,000 plus Rs. 100 per day for continuing defaults.

II. Procedure for Managing Auditor Resignation

A. Board Meeting to Accept Resignation

1. Convening the Board Meeting:

   • Timing: The Board must convene a meeting as soon as possible upon receiving the resignation letter.
   • Agenda: The meeting should cover the acknowledgment of the resignation, acceptance, and next steps for appointing a new auditor.

2. Minutes of the Meeting:

   • Documentation: The minutes should record the acceptance of the resignation, the reasons provided, and the date of resignation.
   • Resolution: Pass a resolution to accept the resignation and note the effective date.

3. Intimation to RoC:

   • The company should confirm that the outgoing auditor has filed Form ADT-3 and retain a copy of the form and confirmation receipt for records.

III. Appointment of New Auditor

A. Filling the Casual Vacancy

1. Board Meeting to Appoint New Auditor:

   • Timing: Convene the Board meeting within 30 days of the resignation.
   • Eligibility Check: Verify that the new auditor meets the eligibility criteria under Section 141 of the Companies Act, 2013.
   • Consent: Obtain the new auditor's consent to act and a certificate of eligibility.

2. Passing of Board Resolution:

   • Resolution: Pass a resolution to appoint the new auditor. Ensure the resolution states that the appointment is subject to ratification by shareholders at the next General Meeting.

3. Filing Form ADT-1:

   • Deadline: File Form ADT-1 with the RoC within 15 days from the passing of the resolution.
   • Content: Include details of the new auditor, their consent, and other required information.
   • Mode of Filing: File electronically through the MCA portal, and ensure payment of the requisite fee.

B. Shareholder Ratification

1. AGM/EGM Inclusion:

   • AGM: If the Annual General Meeting (AGM) is scheduled within three months, include the new auditor’s appointment in the agenda.
   • Notice: Issue a clear 21-day notice prior to the AGM as per Section 101.

2. Calling an EGM if Necessary:

   • Procedure: If the AGM is not imminent, call an Extraordinary General Meeting (EGM) to seek ratification.
   • Notice: Provide a clear 21-day notice for the EGM unless members holding at least 95% of paid-up share capital consent to a shorter notice.

3. Passing of Ordinary Resolution:

   • Resolution: At the AGM or EGM, pass an Ordinary Resolution to ratify the appointment of the new auditor.
   • Minutes: Document the resolution in the meeting minutes and file with the RoC if required.

IV. Compliance with Income Tax Act

A. Tax Audit Compliance (Section 44AB of the Income Tax Act, 1961)

1. Completion of Tax Audit:

   • Timing: The new auditor must complete the tax audit for the financial year 2023-24 by 30th September 2024.
   • Preparation: Ensure all necessary financial records and documents are available to the new auditor.

2. Filing of Tax Audit Report:

   • Forms: Submit the tax audit report electronically in Form 3CA/3CB and Form 3CD.
   • Penalties: Delays in filing may incur penalties under Section 271B, up to 0.5% of turnover or Rs. 1,50,000, whichever is lower.

V. Precautionary Measures to Avoid Defaults

1. Timely Meetings and Filings:

   • Board Meeting: Ensure that the Board Meeting to accept the resignation and appoint a new auditor is conducted within the stipulated timeframes.
   • Filing Forms: Ensure Forms ADT-1 and ADT-3 are filed promptly to avoid penalties.

2. Accurate Documentation:

   • Record-Keeping: Maintain accurate records of all resolutions, notices, and filings related to the resignation and appointment of the auditor.
   • Minutes and Forms: Ensure all minutes and forms are correctly filled and submitted.

3. No Objection Certificate (NOC):

   • Best Practice: Although not mandatory, obtain a No Objection Certificate (NOC) from the outgoing auditor to facilitate a smoother transition and address potential disputes.

Conclusion

Handling the resignation of an auditor and appointing a new one involves meticulous attention to statutory requirements under the Companies Act, 2013, and the Income Tax Act, 1961. By following the detailed procedures outlined in this guidance note, companies can ensure compliance, avoid penalties, and facilitate a smooth transition. Consulting with legal and financial experts is advisable to address specific concerns and ensure full adherence to all statutory obligations.