Who Appoint First Auditor Of A Company
When a new company is formed, one of the essential legal and financial requirements is the appointment of an auditor. The first auditor plays a crucial role in establishing the financial integrity of the company by ensuring that its records are accurate and transparent. For private companies, public companies, or even startups, knowing who appoints the first auditor and understanding the process is fundamental to maintaining compliance with corporate laws and good governance practices.
Understanding the Role of the First Auditor
Why Appoint an Auditor?
An auditor is an independent professional who examines and verifies a company’s financial records. The first auditor ensures that the company’s initial financial reports comply with statutory requirements and represent a fair view of the company’s financial position. This early review sets the tone for future financial reporting and builds trust among shareholders, investors, and regulatory authorities.
Duties of the First Auditor
- Inspect financial records, such as ledgers, vouchers, and receipts
- Check the accuracy of financial statements and accounts
- Ensure compliance with local tax laws and corporate regulations
- Report on financial health and suggest improvements if needed
- Highlight any instances of mismanagement or fraud
Who Appoints the First Auditor?
Appointment by the Board of Directors
In most legal jurisdictions, including countries like India, the United Kingdom, and many others that follow company law frameworks, the first auditor of a company is appointed by the Board of Directors. This appointment usually takes place within 30 days of the company’s incorporation.
The board holds a meeting, passes a resolution, and formally selects the first auditor. The chosen auditor then holds office until the conclusion of the first annual general meeting (AGM). If the board fails to appoint the auditor within the stipulated time, then the responsibility passes to the shareholders.
Appointment by Shareholders or Members
If the Board of Directors does not appoint the first auditor within the required time frame, the company’s members (shareholders) must step in. In such cases, an extraordinary general meeting is called, and the members appoint the first auditor by passing a resolution. This process ensures that the company remains compliant with auditing requirements and avoids legal complications.
Role of the Promoters in the Appointment
During the very early stage of incorporation, especially in small companies and startups, promoters may play a part in identifying suitable candidates for the auditor’s position. However, the formal appointment is still done either by the board or the members, not by the promoters alone. Promoters can suggest names or initiate the process, but legal authority lies with the board or shareholders, depending on the timing.
Legal Frameworks Governing the First Auditor Appointment
Company Law Provisions
Many countries have detailed provisions under their respective company laws that define how the first auditor is to be appointed. For example:
- India: Under Section 139(6) of the Companies Act, 2013, the first auditor is appointed by the Board within 30 days. If they fail, the members must appoint the auditor within 90 days at an extraordinary general meeting.
- United Kingdom: The Companies Act 2006 mandates that private companies are not always required to appoint an auditor unless specific conditions are met, but public companies must do so at incorporation.
- United States: In the case of public companies, external auditors must be appointed and approved by the audit committee of the board, as per Securities and Exchange Commission (SEC) requirements.
topics of Association
A company’s topics of Association (AoA) may contain specific clauses regarding how auditors should be appointed. While statutory law takes precedence, the AoA often outlines internal procedures that complement the legal framework. It may specify the quorum, voting requirements, and additional timelines for the appointment process.
Qualifications and Eligibility of the First Auditor
Who Can Be Appointed?
The individual or firm appointed as the first auditor must meet certain qualifications, which may vary by jurisdiction but generally include:
- Being a certified chartered accountant or holding equivalent professional credentials
- Being independent of the company (no conflict of interest)
- Having valid registration with a regulatory body, such as ICAI in India or PCAOB in the U.S.
Who Cannot Be Appointed?
Certain individuals are disqualified from being appointed as the first auditor. These include:
- Any employee or officer of the company
- A person who is a partner or relative of a director
- Anyone with direct financial interests or loans involving the company
Procedural Steps in the Appointment
Board Meeting and Resolution
The process begins with a board meeting where directors propose and discuss the appointment. A formal resolution is passed to appoint the auditor and fix their remuneration. This resolution is documented in the minutes of the meeting.
Filing with the Registrar
In jurisdictions like India, once the first auditor is appointed, a notice of appointment must be filed with the Registrar of Companies (ROC) using a specified form, often within 15 days. This filing creates a public record of the appointment.
Acceptance of Appointment
The appointed auditor must provide written consent to act as the company’s auditor. This consent is kept with the company records and may also be submitted with government filings.
Duration of the First Auditor’s Term
Tenure Until the First AGM
The first auditor generally holds office from the date of appointment until the conclusion of the company’s first annual general meeting. After that, a new auditor may be appointed or the same auditor can be reappointed by the shareholders at the AGM.
Reappointment or Change
Once the first AGM is conducted, shareholders have the authority to appoint an auditor for a longer term, typically five years, subject to ratification or replacement based on performance and company policy. If the company wants to change the auditor, proper procedures including special resolutions may be needed.
The appointment of the first auditor of a company is a foundational step in ensuring financial accountability and legal compliance. Typically, the Board of Directors is responsible for this appointment within a set timeframe after incorporation. If the board fails to act, shareholders step in to fulfill this obligation. The process is governed by company law and supported by internal regulations such as the topics of Association. Choosing the right auditor at the outset sets the tone for ethical financial practices and builds confidence in the company’s governance. Whether you are a company founder, director, or advisor, understanding who appoints the first auditor and how the process works is vital for the smooth operation of any business.