One of the main functions of auditors is to ensure transparency, trust, and credibility in corporate governance. However, the question arises what will be the situation if the same auditor will be with a company for decades? This is a point where Section 139(2) of the Companies Act, 2013 comes to the rescue. The new law is aimed at a cleaner separation and at keeping off the danger of getting too familiar with one another for too long, thus requiring the change of auditors for particular categories of companies.
Many businesses are still unsure about the application of section 139(2) of the Companies Act 2013, its correlation with section 139(1), and if it is relevant for all companies or just a few. This comprehensive guide explains the act, its purpose, the real-life scenarios, & the relationship with other parts such as section 140, section 141, and section 139(5) of the Companies Act, 2013.
Understanding Section 139 of Companies Act, 2013
Before diving into sub-section (2), it is important to understand section 139 of companies act, 2013 as a whole. This section governs the appointment, tenure, & rotation of auditors.
Per section 139(1) of the Companies Act, 2013, auditors are to be appointed at the first Annual General Meeting and are to remain in office until the conclusion of the sixth Annual General Meeting, with ratification, if any, being subject to the proviso. Nevertheless, this overall provision is not the only one that applies. Section 139 further enumerates certain limitations that are intended to ensure the independence of the audit, & this is the point where the second paragraph of section 139 comes into play.
What Is Section 139(2) of Companies Act, 2013?
Section 139(2) of Companies Act, 2013 mandates mandatory rotation of auditors for prescribed classes of companies. The provision ensures that no individual auditor or audit firm remains associated with a company beyond a fixed period.
As per the law:
⦁ An individual auditor cannot be appointed for more than one term of five consecutive years
⦁ An audit firm cannot be appointed for more than two terms of five consecutive years
After completion of the term, a cooling-off period of five years applies.
Section 139(2) Applicability: Which Companies Are Covered?
One of the most searched questions is “section 139(2) of companies act, 2013 applicability.
Section 139(2) applies to:
⦁ Listed companies
⦁ Unlisted public companies with paid-up share capital of ₹10 crore or more
⦁ Private companies with paid-up share capital of ₹50 crore or more
⦁ Companies having public borrowings from banks, financial institutions, or public deposits of ₹50 crore or more
So, the provision does not apply to all companies, but only to specified classes.
Section 139(2) of the Act Shall Not Be Applicable on Which Company?
Another common confusion revolves around exemptions. The question often asked is: section 139(2) of the act shall not be applicable on which company?
It does not apply to:
⦁ One Person Companies (OPCs)
⦁ Small companies"
⦁ Private companies below the prescribed capital & borrowing thresholds
⦁ Certain dormant companies
This distinction is crucial, as unnecessary auditor rotation can create compliance burdens where the law does not require it.
Also Read: https://callmyca.com/one-person-company
Rotation of Auditors Under Section 139(2)
The phrase “sec 139 of companies act, 2013 rotation of auditors” is widely searched, and rightly so. Rotation is the heart of Section 139(2).
The objective is to:
⦁ Prevent long-term familiarity between auditor & management
⦁ Strengthen professional scepticism
⦁ Improve audit quality & independence"
Companies must also ensure that common partners between outgoing & incoming audit firms are evaluated carefully to avoid indirect continuity.
Section 139(5) of Companies Act, 2013
Section 139(5) of companies act, 2013 empowers the Central Government to direct a company to rotate its auditors if it believes such rotation is necessary in public interest.
While Section 139(2) is mandatory for specified companies, Section 139(5) is discretionary and can apply even beyond standard thresholds.
Role of Section 140 of Companies Act, 2013
Section 140 of companies act, 2013 deals with removal, resignation, and special notice concerning auditors. It becomes relevant when auditor rotation is implemented mid-term or when disputes arise.
Together, section 139(2) and section 140 ensure both mandatory transition and procedural fairness.
Eligibility Under Section 141 of Companies Act, 2013
Rotation means nothing if the incoming auditor is not eligible. Section 141 of companies act 2013 specifies auditor qualifications and disqualifications.
Companies must ensure:
⦁ Independence
⦁ Absence of prohibited relationships
⦁ Compliance with professional limits
Ignoring Section 141 can invalidate the appointment altogether.
Practical Compliance Challenges for Companies
While the intention behind Section 139(2) is sound, implementation often creates challenges. Companies must:
⦁ Track auditor tenure carefully
⦁ Plan transitions well in advance
⦁ Pass appropriate board and shareholder resolutions
⦁ File statutory forms within timelines
Failure to comply may result in regulatory scrutiny and penalties.
Why Section 139(2) Matters for Corporate Governance
Mandatory auditor rotation under section 139(2) of companies act 2013 enhances credibility of financial statements. It reassures shareholders, lenders, and regulators that audits remain unbiased and professionally sceptical.
In an era of increasing corporate accountability, this provision plays a vital role in maintaining trust.
Final Thoughts: Compliance Is Easier Than Correction
For covered companies, it is not possible to ignore section 139(2) of the Companies Act, 2013. The change of an auditor should be considered as one of the positive features of the management system rather than a requirement which imposes additional burden. If everything is in place and there is advice from a professional, then the act of conforming to the requirements will be very easy and there will be no risk involved..
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