Companies Act Section 142

Companies Act Section 142- Remuneration of Auditors

1. Fixation of Remuneration for the Auditor - How is it Decided?

Under Section 142(1), the remuneration to be paid to the auditor of a company must be determined and fixed by the company in a general meeting. This ensures transparency, as shareholders (members) collectively decide the auditor’s compensation during a meeting convened for this purpose.

Flexibility to Decide the Process

The general meeting may either directly fix the remuneration amount or specify a process/manner in which the remuneration will be determined later. For example, the shareholders could authorize the Board of Directors or a specific committee to negotiate and finalize the remuneration within a certain range.

2. Special Rule for First Auditors Appointed by the Board

There is a special provision for the first auditor appointed after the company’s incorporation. According to the proviso to Section 142(1), when the first auditor is appointed by the Board of Directors (as required under Section 139), the Board itself has the authority to fix the remuneration for this first audit engagement.

This is a practical exception, because the first auditor is appointed even before the first Annual General Meeting (AGM) takes place. Thus, until shareholders have the chance to convene and formally appoint the subsequent auditor, the Board handles the first auditor’s fee arrangement.

3. What Does the Term "Remuneration" Include?

Components of Auditor’s Remuneration

As per Section 142(2), the term "remuneration" is not limited to just the basic audit fee. It also includes:

Any expenses incurred by the auditor in connection with the audit assignment.
Example: Travel expenses, accommodation expenses (if the audit involves travel to branch offices), administrative expenses, or any costs directly arising out of the audit process.
Any facilities extended to the auditor in connection with the audit.
Example: If the company provides the auditor with office space, data access, or specialized software required for the audit, the value of such facilities is part of the "remuneration" for audit purposes.
What is Excluded from Remuneration?

However, remuneration for other, non-audit services is excluded from the scope of Section 142. If the auditor provides additional services beyond the statutory audit, such as:

Tax advisory.

Internal control reviews.

Compliance consulting.

Due diligence or valuation assignments requested by the company.

The fees for such non-audit services are not part of the statutory auditor’s remuneration under Section 142. These would be separately negotiated and approved in accordance with Section 144, which governs the prohibition and restriction of certain non-audit services.

4. Rationale and Importance of Section 142

This section ensures that the auditor’s remuneration is determined in a transparent and shareholder-driven process, minimizing the risk of undue influence from management. By requiring general meeting approval (or defining a clear process), the law upholds the independence and impartiality of auditors, which is critical for audit quality and stakeholder trust.

At the same time, the section allows the Board to handle remuneration for the first auditor, recognizing the practical necessity of appointing and compensating the auditor quickly after incorporation, even before shareholders formally meet.