1.31     Query

Appointment of an erstwhile director as auditor.

1. The firm of the querist was appointed as auditor of a company for the year ended June 30,1987. The querist signed the balance sheet of the company on December 5, 1987. At the annual general meeting of the company, held on December 30, 1987, another firm of chartered accountants was appointed in place of the firm of the querist. In the second week of January 1988, the querist was appointed as a director of the company. In the second week of March 1988, the querist resigned from the directorship. In the third week of March 1988, the auditors of the company resigned. The company now desires to appoint the querist as auditor to fill the vacancy caused by the resignation of the auditors.

2. The querist has sought the opinion of the Expert Advisory Committee as to whether, in the circumstances of the case, the querist can accept the appointment.

                                                      Opinion                                                      October 10, 1988

1. The Committee notes that the disqualifications for appointment as company auditor are contained in sub-section (3) of Section 226 of the Companies Act, 1956. The said sub-section reads as below:

“None of the following persons shall be qualified for appointment as auditor of a company-

(a) body corporate;

(b) an officer or employee of the company;

(c) a person who is a partner, or who is in the employment, of an officer or employee of the company; 

(d) a person who is indebted to the company for an amount exceeding one thousand rupees, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding one thousand rupees;

Explanation—References in this sub-section to an officer or employee shall be construed as not including references to an auditor.”

2. A careful reading of clause (b) of sub-section (3) of section 226 would suggest that a person who is an officer or employee of the company at the time of appointment as auditor alone is disqualified for such appointment. There seems to be nothing in the said clause to suggest that a person who has been an officer or employee of the company prior to appointment as auditor is disqualified for appointment. Of course, a person who attracts any of the disqualifications subsequent to appointment as auditor would be deemed to have vacated his office as auditor.

3. In view of the above, the Committee is of the opinion that there is no bar to the querist being appointed as auditor. However, the Committee wishes to emphasise that, before accepting the appointment, the querist should ensure, that in the circumstances of the case, it would be possible to conduct the audit in an independent and objective manner.

___________________________