SES accuses 10 listed firms of violating auditor hiring norms

August 18, 2017

The auditor appointment rules specified by the Companies Act has led to different interpretations. At least 10 publicly traded companies have violated these norms by hiring auditors for terms of less than five years, proxy advisory firm Stakeholder Empowerment Services (SES) said in a report. 

“In current year till now SES has sampled more than 10 companies which have proposed resolution for appointment of auditors for a term of less than five years, which in opinion of SES is blatant violation of law. SES makes it clear that it is only a representative sample, there could be many more cases like this,” the report said. 

According to the Companies Act 2013, an auditor has to be hired for a fixed term of five years and can be reappointed for another term of five years. It further states that this appointment has to be ratified at the annual general meeting (AGM) of shareholders. 

After these norms were notified, companies were given a transition period of three years to adapt to the new rules, which ended in 2016. 

The companies mentioned in the SES report have proposed to appoint auditors for tenures of less than five years. 

For instance, L&T Technology, one of the firms named in the SES report, has proposed appointing an auditor for just a year. 

In an emailed response, the company said, “In view of change in auditors at a group level, it was decided by the board to appoint statutory auditors for a period of one year. The said appointment of auditors would be ratified every year by the shareholders.” 

Another company mentioned in the report is AkzoNobel which is appointing statutory auditor for one year. 

“The law prescribes that the auditor be appointed for a period of five years—with a caveat that the same should be ratified each year at the AGM. De facto, it becomes an annual re-appointment. The present auditors…have been appointed in the 2016 Annual General Meeting. AkzoNobel India intends to continue their appointment for such tenure as required under the Companies Act,” a spokesperson for the firm said in an emailed response. 

“With so many companies compliant with the law, one cannot certainly hide behind complexity of the law. Therefore, it is an attitude of having scant regard for law and its compliance and failure of system to punish non-compliance,” said J.N. Gupta, managing director and co-founder of SES. 

Most of the companies who responded to Mint’s emails seeking comments are reading the five-year appointment clause to mean a maximum of five or 10-year term (since audit firms can be re-appointed once). 

Since our auditors have already served for eight years, we cannot appoint them for more than two years, said Kapil Bagla, director and chief executive officer at Adlabs Entertainment Ltd, another firm named in the report. 

Similarly, Quess Corp. said since its auditors have completed nine years, “appointment of the auditors for a term of five years would result in violation of Section 139 (2) of the Companies Act, 2013. This implies that the incumbent could have been appointed only for an additional period of one year and not five years.” 

“There is no scope for creative interpretation, the section is abundantly clear that word used is ‘shall’ as opposed to ‘may’, which makes it a mandatory compliance requirement that an auditor firm has to be appointed for five years and can be reappointed for another term of five years,” said Ananth Subramanian, practising company secretary and former president, Institute of Company Secretaries of India (ICSI). 

It would be “incorrect and misleading” to say that our appointment of statutory auditors for three years “is not in line” with the Companies Act,” said P.K. Rustagi, vice-president (legal) and company secretary, JK Tyre & Industries Ltd.

“If the intention of the legislation was to have minimum five-year term for auditors then, where was the need for the shareholders to ratify the appointment on annual basis?” 

Punjab Housing Finance, another of the firms named in the SES report, declined to comment.

Bombay Dyeing, Uttam Galva, Wimplast (which has now withdrawn the auditor proposal) and NRB bearings did not respond despite repeated email reminders. 

According to the Companies Act, non-compliance can lead to a fine of maximum Rs5 lakh and for the individual officers can lead to a jail term and fine of up to Rs1 lakh.

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