How to Appoint a Statutory Auditor: First Auditor, Five-Year Term and ADT-1

Every company in India has to have its financial statements audited each year, whatever its size, turnover or level of activity. That means every company needs a statutory auditor, appointed at the right time, in the right way, and reported to the Registrar. This guide explains how the first auditor is appointed, how the five-year term works, and what ADT-1 is.

Who Can Be a Statutory Auditor

The statutory auditor must be a Chartered Accountant holding a certificate of practice from the ICAI, or a firm of Chartered Accountants, including an LLP whose partners are mostly Chartered Accountants. Certain people can't be appointed, including:

• An officer or employee of the company, or a partner or employee of one.
• A person whose relative holds shares in the company above the permitted limit, or who is indebted to it or has given a guarantee in connection with its debts beyond the prescribed limits.
• A person with a business relationship with the company, other than in the ordinary course.
• A person already auditing the maximum number of companies allowed.
• A person convicted of an offence involving fraud within the previous ten years.

Appointing the First Auditor

Under Section 139(6) of the Companies Act, 2013, the board of directors must appoint the first auditor within 30 days of the company's incorporation. If the board doesn't, it informs the shareholders, who must appoint the auditor at an extraordinary general meeting within 90 days.

The first auditor holds office until the conclusion of the company's first Annual General Meeting.

Before the appointment

• Get the auditor's written consent to act.
• Get a certificate from the auditor that they're eligible and that the appointment is within the Act's limits.
• Pass the board resolution appointing them, and inform the auditor in writing.

The Five-Year Appointment at the First AGM

At the first AGM, the shareholders appoint an auditor, either the same one or a new one, to hold office from the conclusion of that meeting until the conclusion of the sixth AGM. In practice, that's a five-year term.

• The appointment is made by ordinary resolution.
• The shareholders also fix the auditor's remuneration, or authorise the board to fix it.
• Until 2018, the appointment had to be ratified by shareholders at every AGM. That requirement was removed, so nothing needs to be done each year unless the auditor changes.

At the end of the term, the auditor can be reappointed for another five years, subject to the rotation rules for larger companies.

Filing ADT-1

After an auditor is appointed at a general meeting, the company files Form ADT-1 with the ROC within 15 days of the meeting. It's signed by a director and includes the auditor's details, the term, and the resolution. Filing it late attracts additional fees that rise with the delay.

Rotation for Larger Companies

Listed companies, and certain larger unlisted companies, must rotate their auditors. An individual auditor can serve only one term of five years, and an audit firm two terms of five years, after which there's a five-year cooling-off period before they can be reappointed. For private companies, rotation applies once paid-up share capital reaches ₹50 crore, or borrowings from banks, financial institutions or public deposits reach ₹50 crore. Most startups and small companies aren't affected.

Common Mistakes

• Forgetting to appoint the first auditor within 30 days of incorporation.
• Not getting the auditor's consent and eligibility certificate before appointing them.
• Missing the five-year appointment at the first AGM, so the company has no auditor for the next year.
• Filing ADT-1 late, or not at all.
• Using the same CA for bookkeeping and the statutory audit, which Section 144 doesn't allow.

Getting Help

Think Filing handles first auditor appointments for new companies, five-year appointments at the first AGM, and ADT-1 filings, and can suggest auditors if you don't have one.