1.25 Query: Continuation by a firm of chartered accountants as statutory auditors when one of the firm’s partners is a director in the holding company. 1. The querists are a firm of chartered accountants who are the statutory auditors of a public limited company, ‘A’ limited, since its incorporation. As a result of amalgamation which will become effective from 1st April, 1996, ‘A’ limited will absorb another public limited company, ‘B’ limited. ‘B’ limited is a subsidiary of another public limited company, ‘C’ limited. By reason of the aforesaid amalgamation with ‘A’ limited, a certain number of shares of ‘A’ limited will be received by ‘C’ limited, in lieu of its holding in ‘B’ limited, so that the shares so received of ‘A’ limited, together with existing holdings of ‘A’ limited’s shares in the hands of ‘C’ limited, will exceed 50% of the total paid-up capital of ‘A’ limited. Thus, ‘A’ limited will become a subsidiary of ‘C’ limited. 2. One of the querist’s firm’s partners, Mr. ‘X’, is a professional director in ‘C’ limited. He is not a salaried director and does not hold any shares in the company. 3. The querists have sought the opinion of the Expert Advisory Committee on the following issues arising from the above:
(i) Whether the firm can continue as statutory auditors of ‘A’ limited for the accounting period commencing from 1st October, 1996, and thereafter, even when one of their partners is a director of its holding company.
(ii) What type of disclosure is required in the auditors’ report of ‘A’ limited if the firm can continue as its auditor?
Opinion October 17, 1997 1.The Committee notes section 226 of the Companies Act, 1956, relevant extracts of which are as under:
“Section 226: Qualifications and disqualifications of auditors -
(1) A person shall be qualified fro appointment as auditor of a company unless he is a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949):
Provided that a firm whereof all the partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company, in which case any partner so practising may act in the name of the firm. ………….
(3) None of the following persons shall be qualified for appointment as auditor of a company. ………….
(b) an officer or employee of the company. ………….
(4) A person shall also not be qualified for appointment as auditor of a company if he is, by virtue of sub-section (3), disqualified for appointment as auditor of any other body corporate which is that company’s subsidiary or holding company or a subsidiary of that company’s holding company, or would be so disqualified if the body corporate were a company.
(5) If an auditor becomes subject, after his appointment, to any of the disqualifications specified in sub-sections (3) and (4), he shall be deemed to have vacated his office as such.”
2. The Committee further notes the definition of the term ‘officer’ under section 2(30) of the aforesaid Act, the relevant extract of which is as under:
“2(30) ‘officer’ includes any director ……..” 3. The Committee observes, on the basis of the above, that the Companies Act, 1956, disqualifies any of its officers to act as its auditors and the term ‘officer’ includes a director. The Committee further observes that the aforesaid Act allows a firm to be appointed as auditors of a company whereof all the partners practicing in a India are qualified for appointment as auditor. Based on the facts submitted by the querist in para 2 of the query, the Committee is of the view that the querist’s partner who is a director in ‘C’ limited (holding company of ‘A’ limited) is disqualified to act as auditor of ‘A’ limited (the subsidiary of ‘C’ limited) by virtue of section 226(3) and 226(4) from the date the amalgamation becomes effective. 4. Based on the above observations, the Committee is of the following opinion on the issues raised in para 3 of the query:
(i) The querist firm cannot continue as statutory auditors of ‘A’ limited from the date the amalgamation becomes effective.
(ii) This question does not arise in view of (i) above. _________________________
|