CA to give valid reason before resigning as Auditor of the Company

The third proviso to Section 139(2) of the Companies Act 2013 (CA-13) allows auditors to resign from their position. Moreover, Section 140(2) provides the procedure for such resignation. An auditor that resigns from a company shall file a statement (Form ADT-3) within 30 days with the company and the RoC indicating the reasons and other facts as may be relevant about her resignation. Rule 8 of the Companies (Audit and Auditors) Rules, 2014 refers to the form of such a statement, which shall include the ‘reasons for resignation’ and ‘any other facts relevant to the resignation’.

Refer: Company Law Committee Report

Companies Law Committee of 2016 (CLC 2016) had deliberated on the provisions concerning the punishment if such a statement is not filed within the prescribed time. It observed:

“Section 140 (3) prescribes a minimum fine of Rupees fifty thousand in case the auditor does not file the statement with regard to his resignation. This fine was considered onerous for auditors of small companies. The Committee recommended that the minimum fine may be reduced to Rupees fifty thousand or the audit fees, whichever is lesser.”

Presently, if an auditor does not comply with the provisions of Section 140(2), Section 140(3) specifies that she shall be liable to a penalty of fifty thousand rupees or an amount equal to her remuneration, whichever is less, and in case of continuing failure, with a further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees.

The Committee received representations that there have been several instances of resignation by auditors despite the concerned provisions. In 2018, the Committee of Experts on Regulating Audit Firms and their Networks had also observed that:

“The year 2018 also witnessed the resignation of several statutory auditors of listed entities over a short period of time. MCA has already ordered investigation to ascertain the reasons behind these resignations.”

In this regard, attention may be drawn to the provision in the UK Companies Act, 2006 concerning the resignation of auditors. An auditor may resign from office on submitting a statement to the company concerning the circumstances of the resignation. An auditor must expressly state the matters which she considers necessary to be brought to the attention of members or creditors of the company. Failure to file such a statement makes the auditor liable to a statutory fine.80 The company must either forward such a statement to the shareholders or approach the relevant adjudicatory body for appropriate directions for not sending such information. The Act also empowers the auditor to requisition a general meeting. She can give a notice to this effect to the company’s Board.

Thus, the Committee was of the opinion that there is a need to review the provisions concerning the resignation of auditors. Particularly, it was felt that there is a need for a resigning auditor to assure the shareholders and other stakeholders that, in her opinion, there is nothing in the company’s accounts which needs to be brought to their notice, and that her resignation is an independent decision. The auditor shall be under an explicit obligation to make detailed disclosures before resignation and should specifically mention whether such resignation is due to non-cooperation from the auditee company, fraud or severe non-compliance, or diversion of funds. Moreover, if such information comes to light after the resignation of an auditor but has not been disclosed in the resignation statement, suitable action may be taken against the resigning auditor. The Committee was of the clear view that similar obligations of a resigning auditor may be borrowed from the UK Companies Act, 2006.