Companies Act Section 141

Companies Act Section 141- Eligibility, Qualifications, and Disqualifications of Auditors

1. Eligibility for Appointment as Auditor - Who Can Be Appointed?

Under Section 141(1), a person is eligible for appointment as an auditor of a company only if that person is a Chartered Accountant as defined under the Chartered Accountants Act, 1949.

Appointment of Firm as Auditor

In addition to individuals, a firm can also be appointed as the auditor of a company, but only if:

The majority of partners in the firm practising in India are qualified Chartered Accountants.

In such cases, the firm itself may be appointed in its firm name, and the audit engagement will be carried out under that name.

2. Who Can Sign the Audit Report When a Firm is Appointed?

As per Section 141(2), when a firm (including a Limited Liability Partnership (LLP)) is appointed as the company’s auditor, only partners who are qualified Chartered Accountants are authorised to:

Act on behalf of the firm in performing audit-related work.

Sign the audit report and any related documents on behalf of the firm.

This ensures that only professionally qualified individuals are responsible for the actual conduct of the audit.

3. Disqualifications - Who Cannot Be Appointed as Auditor?

Section 141(3) provides a comprehensive list of persons who are disqualified from being appointed as an auditor of a company. These are:

(a) Body Corporate (Other than LLP)

A body corporate (any entity other than an LLP registered under the Limited Liability Partnership Act, 2008) cannot be appointed as an auditor.

(b) Officer or Employee of the Company

An officer or employee of the company is disqualified from becoming the auditor, as this would create a clear conflict of interest.

(c) Partner or Employee of an Officer/Employee

Any person who is either:

A partner of an officer or employee of the company.

In the employment of an officer or employee of the company.

This prevents the appointment of individuals who may be influenced by their association with company personnel.

(d) Individuals with Certain Financial or Business Interests

This disqualification applies to a person, or their relative or partner, if any of the following conditions exist:

(i) Holding of Shares/Securities

If the person, their relative, or their partner holds any security or interest in:

The company.

A subsidiary of the company.

The holding company or associate company.

A subsidiary of the holding company.

Exception: A relative is permitted to hold shares or securities up to a value of ?1,000 (or such higher amount as may be prescribed by the rules).

(ii) Indebtedness to the Company

If the person, their relative, or their partner owes money to:

The company.

Its subsidiary, holding company, or associate company.

A subsidiary of the holding company.

This disqualification applies if the debt exceeds a prescribed threshold amount.

(iii) Guarantees Provided

If the person, their relative, or their partner has provided a guarantee or security related to:

Indebtedness of any third person to the company.

Indebtedness to the subsidiary, holding company, associate company, or subsidiary of the holding company.

This is also subject to a prescribed threshold.

(e) Business Relationships with the Company

If the person or firm has a business relationship (either directly or indirectly) with:

The company.

Its subsidiary, holding company, associate company, or subsidiary of the holding company.

Such relationships are disqualifying if they are of a nature prescribed under the rules.

(f) Relatives in Key Positions

If the relative of the auditor is:

A director of the company.

In employment with the company as a director or key managerial personnel (KMP).

(g) Full-Time Employment Elsewhere / Overboarding

A person is disqualified if they:

Have a full-time job elsewhere (apart from their audit practice).

Are already auditor for more than 20 companies at the time of appointment or reappointment.

This restriction helps ensure auditors have adequate time and attention for each audit.

(h) Convicted for Fraud

A person convicted by a court for an offence involving fraud is disqualified if:

10 years have not passed since the date of conviction.

(i) Providing Prohibited Services under Section 144

A person who directly or indirectly renders any of the non-audit services prohibited under Section 144 to:

The company.

Its holding company.

Its subsidiary company.

Explanation of "Directly or Indirectly"

The phrase “directly or indirectly” is to be understood in line with the Explanation provided in Section 144. This ensures that auditors do not provide prohibited services either themselves or through related entities in which they have a material interest.

4. Consequences if a Disqualification Arises After Appointment

Under Section 141(4), if any auditor who has already been appointed subsequently becomes disqualified under any of the grounds listed in sub-section (3), they must:

Immediately vacate the office of auditor.

This vacancy will be treated as a casual vacancy under the Companies Act.

The company will then need to appoint a new auditor to fill the casual vacancy, following the prescribed process for such appointments.