How should you deal if Auditor resigns without Auditing the books of accounts?

#1- Understanding the case

Now that we have discussed our case, let's see how the law defines some terms and procedures that are relevant to our case.

#2- Terms and Procedures

1. Casual Vacancy

What is vacancy?

Vacancy is a state where a person assigned to perform a certain task has to leave the position. Vacancy may arise due to resignation, death or retirement of the person assigned to do the task.

What is casual vacancy?

When a person assigned to do a task for a certain period of time, but leaves that position before the completion of said period, it is said to be a casual vacancy.

When does casual vacancy in the office of auditor arise?

In our case, Ravi was supposed to audit the books of SPL till 31st March 2017. However, he resigned without fulfilling his duties. Thus a casual vacancy is created in the office of the auditor.

Casual Vacancy can arise due to many reasons, to name a few:

• Death of Auditor
• Liquidation of Auditors Firm
• Auditor is disqualified from auditing by the law due to professional misconduct
• Resignation of Auditor before his term has ended. (due to any reason)

What does a company do when casual vacancy arises in the office of the auditor?

When a casual vacancy arises in the office of the auditor, the directors have to appoint a new auditor.

This appointment should be made within 30 days from the creation of such casual vacancy.

However, in case the casual vacancy has arised due to the resignation of the auditor, the appointment of the shareholders should be ratified by the shareholders of the company.

2. Ratification by Shareholders

What does Ratification by shareholders mean?

Ratification by shareholders means that the shareholders of the company approve the appointment of new auditor by the directors of the company.

When is ratification by shareholders required?

Ratification by shareholders is only necessary when the casual vacancy has arised due to resignation of auditor.

Why is Ratification by Shareholders required?

This is because, the auditor may have resigned because of management interference in his works to impact his independence.

How is the process of ratification carried out?

What does the company do?

The Directors, within 30 days of their appointment of a new auditor, will call a general meeting of shareholders.

A special business transaction is discussed in the meeting regarding such ratification, and the directors will call the members to vote on this ratification.

This business should be carried by the members by the way of an ordinary resolution. This means, at least 51% of the members present in the meeting and voting should agree to ratify the appointment.

How do the shareholders ratify the appointment?

Thus, in the process of ratification, the members of SPL will understand the reason of resignation of Ravi, whether or not it was because of any foul practices of the directors to manipulate the auditing process or the independence of the auditor.

And accordingly, the members of SPL:

• Will reject the new auditor appointed by the management if they find that the new auditor thus appointed is involved with the management in the foul practices.
• Will accept the new auditor appointed by the management, in case resignation was due to any other reasons. This acceptance is called ratification by shareholders.

4. Notifying the Registrar of Companies of Appointment of new auditor. (Form ADT-1)

Form ADT-1 Available in the MCA portal. This should be filed by the company within 15 days from:

• The date of appointment by directors, in case the casual vacancy arises due to any other reasons than "Resignation"
• The date of ratification, in case the casual vacancy arises due to the resignation of the auditor.

In our case of SBL, if the ordinary resolution is passed, the auditor is said to be ratified. The company should file ADT-1 within 15 days of such ratification to notify the Registrar of Companies of the appointment of said new auditor.