Introduction

Removing or changing an auditor in a company is a significant corporate governance decision. Removal or Change of Auditor must follow a strict legal procedure under the Companies Act, 2013, to prevent arbitrary dismissal and ensure fairness. In this article, we explain the full process, relevant provisions, and compliance tips in India.

Key Legal Provisions Governing Auditor Removal

• Section 140(1) of the Companies Act, 2013 provides that an auditor appointed under Section 139 may be removed before the expiry of their term only by a special resolution and after obtaining prior approval of the Central Government, delegated to the Regional Director
• Rule 7 of the Companies (Audit and Auditors) Rules, 2014 outlines procedural details including the use of Form ADT-2 for removal.
• An auditor who resigns must file Form ADT-3 within 30 days, disclosing reasons and facts relevant to resignation.
• The National Company Law Tribunal (NCLT) may order removal if it finds fraudulent or wrongful conduct, and may disqualify that auditor from appointment for five years.

These safeguards ensure that auditor removal is not arbitrary and that the auditor has the opportunity to defend their position.

When and Why a Company May Change or Remove an Auditor

Before diving into the process, it helps to understand when a company might remove or change an auditor:

• Loss of trust or confidence, non-cooperation, or performance issues
• Conflict of interest or breach of ethical norms
• Rotation requirement (in certain cases, rotation of audit firm or audit partners is mandated)
• Fraud, misconduct or violation detected by stakeholders or regulators
• Voluntary resignation by auditor
• Regulatory or tribunal direction requiring change

Whatever the reason, the company must follow due process and document valid grounds.

Step-by-Step Procedure for Removal or Change of Auditor

Below is a structured, stepwise approach. (This section may exceed 300 words, so I have broken it into subheadings for readability.)

1. Audit Committee Approval (if applicable)

If the company has an Audit Committee under Section 177, the committee’s approval is required in a duly convened meeting before any Board action.

2. Board Meeting & Resolution

• The Board calls a meeting (with proper notice, agenda, notes) to consider removing the auditor.
• The auditor to be removed must be informed in advance and given a chance to be heard.
• The Board passes a resolution authorizing application to the Regional Director (RD) / Central Government (via Form ADT-2) and, later, calling an Extraordinary General Meeting (EGM) for shareholder approval.

3. Application to Regional Director (using Form ADT-2)

• Within 30 days of the Board resolution, the company must file ADT-2 with the RD (Central Government’s delegated authority), including the grounds, board resolution, and relevant documents.
• It must accompany fees as prescribed under Companies (Registration Offices and Fees) Rules, 2014.
• The RD gives a hearing to the auditor and the company, and then either allows or rejects the request.

4. Extraordinary General Meeting & Special Resolution

• Upon approval from RD, the company must call an EGM within 60 days.
• The auditor must again be given the chance to be heard at the meeting if they haven’t already.
• Shareholders must pass a special resolution (typically 75% or higher vote) to formalize the removal.

5. Post-Resolution Filings & Formalities

• The company must file MGT-14 (special resolution) with the Registrar of Companies (ROC) within 30 days of passing the resolution.
• In the case of a listed company, the decision, removal, and RD order must be disclosed to stock exchanges (within prescribed time frames, often 24 hours or 12 hours) and published on the company website.
• If removal is approved, a new auditor must be appointed (by shareholders) to fill the vacancy.
• File any required certified copy of the RD order in Form INC-28 with the ROC within 30 days.

6. Resignation (Alternate Route)

• An existing auditor may resign voluntarily by submitting a notice to the Board.
• Within 30 days, file Form ADT-3 with the Company and ROC (and CAG in case of government company) stating reasons for resignation.
• The company must fill the casual vacancy by appointing a new auditor within three months, with members’ approval at a general meeting.

Practical Tips & Pitfalls (SEO: Best Practices)

• Draft clear, fact-based reasons for removal in ADT-2; vague or weak grounds might lead to rejection.
• Ensure strict compliance with timelines (30 days for ADT-2; 60 days for EGM) to avoid procedural invalidity.
• Keep robust documentary evidence (Board minutes, notices, auditor’s representations) to support your case.
• For listed companies, additional compliance (SEBI disclosures, regulatory filings) becomes critical.
• When the auditor challenges removal, be prepared for legal scrutiny — Tribunal/NCLT may intervene under Section 140(5).

Frequently Asked Questions (FAQs) on Removal or Change of Auditor in India

1. What is the legal procedure to remove an auditor in India?

A company can remove its auditor before the end of their term only after obtaining prior approval from the Regional Director (RD) and passing a special resolution in a general meeting. The company must first hold a board meeting, file Form ADT-2, and upon RD’s approval, conduct an EGM to pass the resolution.

2. Can a company remove an auditor without government approval?

No. As per Section 140(1) of the Companies Act, 2013, a company cannot remove an auditor without prior approval from the Central Government (delegated to the RD). Direct removal through a board or general meeting alone is invalid.

3. Which MCA form is required to remove an auditor?

To remove an auditor, the company must file Form ADT-2 within 30 days of the board resolution seeking Regional Director approval. After approval and EGM, Form MGT-14 is filed for the special resolution.

4. What if the auditor resigns voluntarily?

If an auditor resigns, they must file Form ADT-3 with the ROC within 30 days, mentioning the reason for resignation. The company must then appoint another auditor within three months in a general meeting.

5. How long does the process of auditor removal take?

The entire process may take around 60 to 90 days, depending on the time taken by the Regional Director’s approval and company’s compliance with notice and filing timelines.

6. Is the auditor entitled to be heard before removal?

Yes. The law mandates that the auditor must be given a fair opportunity to be heard both before the Board and during the General Meeting. Failure to provide this opportunity can render the removal invalid.

7. What are the common reasons for changing an auditor?

Common reasons include:

• Loss of confidence or non-performance
• Conflict of interest
• Regulatory direction or audit rotation
• Misconduct or fraud allegations
• Auditor’s resignation due to differences with management

8. What happens if a company fails to follow the prescribed procedure?

Non-compliance with the auditor removal procedure can lead to rejection of ADT-2 by the Regional Director, penalties, and even disqualification of the company’s directors under certain circumstances.

9. Can shareholders object to the removal of an auditor?

Yes. Since removal requires a special resolution, shareholders who disagree can vote against the proposal during the EGM. The decision must reflect at least a 75% majority approval to be valid.

10. Can an auditor challenge their removal?

An auditor can represent their case before the Regional Director and also approach the NCLT (National Company Law Tribunal) if the removal is arbitrary or based on false grounds.

11. Is it mandatory to appoint a new auditor immediately after removal?

Yes. The company must fill the vacancy of auditor within three months through a shareholders’ resolution, ensuring no audit year is left unattended.

12. Can a company re-appoint the same auditor after removal?

Usually, no. Once removed before the expiry of term, the same auditor cannot be re-appointed for five years, unless permitted by the Central Government.

13. Are there any specific provisions for listed companies?

Listed companies have additional obligations under SEBI (LODR) Regulations, 2015 — such as disclosure of removal/resignation to the stock exchange within 24 hours and updating the company website accordingly.

14. What documents are required for Form ADT-2 filing?

Documents include:

• Certified copy of Board Resolution
• Auditor’s written representation (if any)
• Notice and minutes of board/EGM
• Statement of reasons for removal
• Proof of payment of prescribed fees

15. What penalties apply for non-filing of ADT-3 by auditor?

If an auditor fails to file ADT-3 within 30 days, they may face a penalty of ₹50,000 to ₹5,00,000, as prescribed under Section 140(3) of the Companies Act, 2013.

16. Is removal of a first auditor different from a subsequent auditor?

Yes. The first auditor, appointed by the Board, can be removed by the shareholders through an ordinary resolution before the first AGM — without RD approval. For all subsequent auditors, RD approval and special resolution are mandatory.

17. Which authority finally approves the auditor’s removal?

The Regional Director (Ministry of Corporate Affairs) grants final approval after verifying the application in Form ADT-2 and giving both sides an opportunity to be heard.

18. Can the auditor resign during investigation or proceedings?

Yes, but they must clearly disclose the reason in ADT-3. If the resignation aims to avoid disciplinary or legal action, NCLT may still hold the auditor liable under Section 140(5).

19. What role does the Board of Directors play in the removal process?

The Board initiates the process by:

1. Considering reasons for removal
2. Approving filing of ADT-2
3. Convening the Extraordinary General Meeting
4. Ensuring compliance filings and appointment of a new auditor

20. Can removal of an auditor affect the company’s audit report timeline?

Yes. Delays in auditor appointment or removal can impact the statutory audit schedule and may attract penalties for late filing of AOC-4 and MGT-7A. Hence, companies should complete the process before the audit cycle begins.

Learn the step-by-step procedure to remove or change an auditor under Indian corporate law. Understand legal requirements, key forms (ADT-2, ADT-3), shareholders’ role, and compliance obligations.