Auditors’ disqualification on account of business relationships: purport and scope
– Neha Malu, Executive (corplaw@vinodkothari.com)
Background
Considering the key significance of auditors’ independence in ensuring the integrity of the statutory audit function, the Companies Act, 2013 (‘Act’) has prescribed several eligibility conditions, qualifications as well as disqualifications for their appointment. While there are several disqualifications under section 141, which includes indebtedness, provision of guarantee, conviction, etc. The existence of a “business relationship” between the auditor and auditee has also been stated as one of the prima facie disqualifying factors for a person to be appointed as an auditor in a company. It is significant to note that this disqualification was not there under the corresponding provisions of the Companies Act, 1956.
The relevant clause dealing with ‘business relationship’ is clause (e) of sub-section (3) of Section 141 of the Act. The clause (as reproduced below) has a wide coverage and includes all direct as well as indirect business relationships as under –
‘A person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed shall not be eligible for appointment as an auditor of a company.’
Further, the meaning of the phrase ‘business relationship’ has been detailed out under sub-rule (4) of Rule 10 of the Companies (Audit and Auditors) Rules, 2014 (‘Rules’) which also carries certain carve-outs. In this article, we have tried to unbox the said carve-outs given for the existence of those business relationships which do and which do not lead to disqualifying the auditors from appointment.