Removal of Auditors
Rakesh Gupta
Rakesh Gupta (FCS, LLB) is a seasoned corporate and legal advisor with over a decade of experience in Company Law, Secretarial and Compliance services. He leads RMR & Company, a peer-reviewed Practicing Company Secretary (PCS) firm renowned for its expertise in ROC filings, NCLT matters, and a wide range of corporate legal assignments. Through his deep knowledge and practical approach, Rakesh continues to support businesses in navigating complex regulatory landscapes.
Auditors play a crucial role in verifying a company’s financial statements and ensuring compliance with legal and regulatory standards. Their independent assessments bolster stakeholders’ trust and help maintain corporate transparency. However, there are circumstances where the removal of an auditor becomes necessary — whether due to loss of confidence, conflict of interest, or allegations of misconduct. This article outlines the framework, procedure, and implications of removing auditors, with particular focus on Indian corporate law.
Legal Framework
The removal of auditors is governed by the Companies Act, 2013, particularly under Section 140(1). As per the law, a company can remove an auditor before the completion of their term by:
- First securing approval from the Central Government (by filing Form ADT-2),
- And then passing a special resolution at a general meeting of shareholders.
This two-stage safeguard ensures that the auditor’s independence is protected, and that removal is not done without proper cause. Moreover, the auditor must be given a fair opportunity to be heard before any removal action is finalized.
Step-by-Step Removal Process
The removal process involves several important steps:
- Board Meeting:
The Board of Directors must convene and pass a resolution proposing the removal of the auditor. This resolution should clearly mention the reasons behind the proposed action. - Application to the Central Government:
An application seeking the Central Government’s approval must be filed using Form ADT-2 within 30 days of the Board meeting. This application should detail the grounds for removal and include relevant supporting documents. - Hearing the Auditor:
Before granting approval, authorities will ensure that the auditor in question is given an opportunity to present their side. - Approval by Central Government:
Upon review, the Central Government may accept or reject the removal request. This decision typically follows a detailed examination of all facts and arguments presented. - Special Resolution by Shareholders:
Following the Central Government’s approval, the company must hold a general meeting and pass a special resolution, requiring at least 75% majority support. - Reporting to the Registrar of Companies (ROC):
After removal, the company must inform the ROC by submitting the necessary forms within the prescribed time limit.
Grounds for Removal
While removal is a significant step, it may become necessary under the following circumstances:
- Loss of Confidence: The management or shareholders may lose faith in the auditor’s ability to perform independently.
- Conflict of Interest: If the auditor develops personal or professional relationships that compromise their objectivity.
- Professional Misconduct: Engaging in activities that violate ethical norms or legal standards.
- Substandard Performance: Repeated instances of carelessness, errors, or poor-quality audits.
- Organizational Changes: Mergers, acquisitions, or shifts in ownership structure that prompt a review of audit relationships.
Distinction Between Removal and Resignation
It is important to differentiate between removal and resignation:
- Removal is initiated by the company and follows a formal legal process.
- Resignation occurs when the auditor voluntarily steps down, usually requiring the auditor to file Form ADT-3 with the ROC.
Both scenarios involve different procedural and disclosure requirements.
Legal and Judicial Perspective
Courts in India have consistently emphasized that an auditor’s removal should not be arbitrary. The requirement of prior approval from the Central Government acts as a significant safeguard to prevent unjust dismissals that could undermine auditor independence.
Where a removal is driven by retaliation — for instance, when an auditor highlights financial irregularities — judicial intervention ensures that such removals do not go unchecked.
Thus, the law aims to balance the company’s right to manage its affairs with the need to protect the integrity of the auditing function.
Risks of Non-Compliance
If the company removes an auditor without following the prescribed procedures:
- The removal may be legally invalid.
- Penalties and sanctions under the Companies Act may apply.
- The company’s reputation could suffer among investors, regulators, and the public.
- Wrongfully removed auditors may pursue legal remedies against the company.
Conclusion
The removal of an auditor is a serious matter that demands careful adherence to the legal process. It is not merely an administrative formality but a significant event that impacts corporate governance and investor confidence.
By ensuring that the process is fair, transparent, and backed by justifiable reasons, companies demonstrate their commitment to ethical standards and financial accountability. In today’s environment of heightened regulatory scrutiny, maintaining the independence and integrity of auditors is not only a legal requirement but also a business imperative.
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