Discuss the validity of the appointment of the auditor in under mentioned case and give reasons for the same. (5 Marks each, June 2002)
a. M/s AB& Co. were the Statutory Auditors of M/s MNP & Co. Ltd. for last several years. Board of Directors were not happy with the services rendered M/s AB & Co. Hence, they appointed M/s CD & Co. as Statutory auditors passing a Special resolution in the board meeting.
b. M/s P. Ltd. was incorporated on 1st April 2001. The Board of Directors of M/s P. Ltd appointed M/s MSP & Co. as auditors within one month of its date of incorporation. The shareholders objected to the appointment of M/s MSP & Co. as auditors and wish to remove M/s MSP & Co. before the conclusion of the annual General Meeting.
c. Mr. X a Chartered Accountant was in full time employment with M/s YZ Ltd. Subsequently Mr. X was appointed as auditor of PQ Pvt. Ltd. for the year 2002-2003 the board of Directors.
d. 60% of the paid-up Capital of M/s UM Ltd. is held the Central Government M/s XYZ & Co. firm of Chartered Accountants were appointed as statutory Auditors of M/s UM Ltd. passing an ordinary resolution in the Annual General Meeting
As per Sec 119(2) of Companies Act 2063, if any auditor breaches the code of conduct of auditors or does any act against the interest of the company which has appointed him as the auditor or commits any act contrary to the prevailing law, such auditor may be removed through the same process wherehe/she was appointed as auditor, giving prior information to the Nepal Chartered Accountants Institute, and with the approval of the regulatory authority, if any authorized the prevailing law for the regulation business of the company concerned , and failing such authority, with the approval of the Office. Therefore, action of BOD is not appropriate.
As per Sec 111(1) of the Companies Act 2063, The auditor of accompany shall be appointed, from amongst the auditors licensed to carry out audit under the prevailing law, the general meeting, in the case of a public company, and, in accordance with the provision as contained in the memorandum of association, articles of association or consensus agreement, any failing such provision, the general meeting, in the case of a private company; and his/her name shall be forwarded to the Office within fifteen days from the date of such appointment.
Provided, however, that the board of directors may appoint the auditor prior to the holding of the first annual general meeting. Therefore, contention of Shareholders is not correct.
The auditor has to consider self-review threat if he was in employment with the company immediately before the appointment as an auditor. The independence of the auditor may be affected. Hence, necessary safeguards are to be applied and since 3 years have not elapsed the auditor is suggested to not to accept the appointment.
As per Sec. 11 of Audit Act 2075, the Auditor General shall be consulted while appointing an auditor for auditing of the corporate bodies substantially owned Government of Nepal. Accordingly, the auditor of company substantially owned Government of Nepal shall be appointed or re-appointed advice of the Office of Auditor General.