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Removal of Auditor

Introduction

Currently, an auditor may only resign if he is not the sole auditor of the company and his resignation must be made at a general meeting of the company. If an auditor gives notice in writing to the directors of the company that he wishes to resign, the directors shall call a general meeting of the company as soon as it is practicable. This is for the purposes of appointing an auditor in place of the auditor who wishes to resign and to appoint another auditor.

The resignation of the auditor shall take effect upon the appointment of another auditor. Besides, an auditor may only be removed by shareholders at the general meeting where notice of the intention to move the resolution to remove the auditor must be given to the company not less than 28 days before the meeting at which the resolution is to be moved. The auditor must be given a copy of the notice and he may make representations to the company dealing with his removal.

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The Bursa Malaysia Securities Berhad Listing Requirements requires that in the case of the removal of an external auditor the listed issuer must forward to the Exchange a copy of any written representations made by the external auditors at the same time as copies of such representations are sent to members of the listed issuer under section 172(5)(b) of the Companies Act 1965, unless an order is made by the Registrar of Companies under section 172(6) of the Companies Act 1965.

If the company did not appoint an auditor in place of the auditor so removed, the Registrar of companies will appoint an auditor but the auditor must consent to the appointment.

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There are views that the current legal position in relation to the resignation and removal of auditors requires improvement. In relation to auditors’ resignation, the Companies Act states that an auditor may resign if he is not the sole auditor and such resignation must be made at a general meeting. The resignation is also only effective when a new auditor is appointed by the company.

The UK Companies Act 2006

In the UK Companies Act 2006, an auditor of a company may resign his office by depositing a notice in writing to that effect at the company’s registered office. The notice is not effective unless it is accompanied by the statement required by section 519. The auditor may deposit with the notice a signed requisition calling on the directors of the company to forthwith duly convene an extraordinary general meeting of the company for the purposes of receiving and considering such explanation of the circumstances connected with his resignation as he may wish to place before he meeting. The notice of resignation will be effective to end the auditor’s term of office as of the date on which the notice is deposited or on such later date as may be specified in it. The company shall within 14 days of the deposit of a notice of resignation send a copy of the notice to the registrar of companies. If default is made in complying with this subsection, the company and officers who are in default are guilty of an offence and liable to a fine.

If the directors do not within 21 days from the date of the deposit of a requisition under this section proceed duly to convene a meeting for a day not more than 28 days after the date on which the notice convening the meeting is given, every director who failed to take all reasonable steps to secure that a meeting was convened as mentioned above is guilty of an offence and liable to a fine. A company may by ordinary resolution at any time remove an auditor from office subject to a special notice of the resolution being given.

Where a resolution removing an auditor is passed at a general meeting of a company, the company shall within 14 days give notice of that fact in the prescribed form to the Registrar. If a company fails to give the notice required by this subsection, the company and officers who are in default are guilty of an offence and liable to a fine and, for continued contravention, to a daily default fine.

In addition, if a company does not want to reappoint the existing auditor, the UK Companies Act 2006 requires that a resolution is proposed as a written resolution of a private company to appoint a person as auditor in place of a person (the “outgoing auditor”) whose term of office has expired, or is to expire, at the end of the period for appointing auditors. In such a case, the company must send a copy of the proposed resolution to the person proposed to be appointed and to the outgoing auditor.

The outgoing auditor may make written representations relating to the proposed resolution within 14 days after receiving the notice and request that the representation be circulated to members of the company. Where the auditor ceases to hold office, section 519 requires a statement for the reason of ceasing to hold office to be deposited with the company, submitted to the Registrar and notified to the audit authority.

The proposition of UK CLR

The auditor is also required either to state that there are no circumstances connected with his or her resignation that need be brought to the attention of members or creditors of the company, or to set out what are the circumstances for his resignation to be circulated by the company. The publication of the auditor’s resignation statement was proposed by the UK CLR and was accepted by the UK Government. The rationale was that the publication will enable investors to understand the reasons for the resignation of the auditor and will result in greater understanding and transparency and reduce speculations against the company or the auditors.

In Australia, an auditor of a company may resign by way of a written notice given to the company and at the same time, to the ASIC applying for consent to the resignation and stating the reasons for the application. Currently, the resignation takes into effect once ASIC has consented to the resignation which by virtue of section 331 AC (5) starts on the day (if any) specified for the purpose in the notice of resignation, on the day on which ASIC gives its consent to the resignation or on the day (if any) fixed by ASIC for the purpose whichever occurs last.

ASIC requires the auditor to write in for its consent and statements made by the auditor in relation to his resignation are not admissible in civil or criminal proceedings against the auditor. Under the present section 172(14) and (15) of the Companies Act 1965, an auditor may resign only when a new auditor is appointed and only at a general meeting of the company and the resignation will only be effective on the appointment of another auditor. The CLRC is of the view that section 172(14) and (15) should be amended.

The CLRC

Whilst the CLRC is aware that the reason for this statutory provision is to ensure that a company will continue to have an auditor at all times, this should not be a reason to force an auditor to stay in office. It is the directors’ responsibility to ensure that a new auditor is appointed if the existing auditor wishes to resign. Furthermore, while section 172(15) states that the directors shall call a general meeting as soon as is practicable for the purposes of appointing a new auditor, there is no time frame specified within which the directors must call and convene a general meeting.

To ensure that that the company’s interest is not prejudiced, the CLRC recommends that if the auditor ceases to hold office due to a resignation, the directors must proceed duly within 21 days from the date of the deposit of a notice of resignation to convene a meeting for a day not more than 28 days after the date on which the notice convening the meeting is given. Every director who failed to take all reasonable steps to secure that a meeting was convened as mentioned above is guilty of an ffence and liable to a fine. The effective date of resignation is at the end of 21 days from the time the notice is deposited with the company The recent Companies (Amendment) Act 2007 imposes a duty on the auditor who is removed from office and who sends a written representation to the company or who has resigned, to submit the written representation to the Registrar and the Stock Exchange if the company is a public listed company.

The information must be submitted to the regulators within 7 days of the submission of the written representation or resignation to the company. The fact that the auditor is required to give reasons for his resignation or declining reappointment would be in the interest of the shareholders of the company who would be able to hear directly from the auditor on this decision since the appointment of the auditor was initially approved by the shareholders at the general meeting.

High Level Finance Committee

The CLRC noted that the High Level Finance Committee recommended that auditors should be required to give reasons for the resignation or non-renewal of services, as it provides an early warning signal to the investors and the regulators about the company’s financial situation. The CLRC noted that under the current section 172 of the Companies Act 1965, an auditor who is to be removed from office may submit a written representation to the company and request that the written representation be sent to every member who is entitled to receive the notice of meeting. There is however, no similar provision in the case of a resignation.

The CLRC thus recommends that a resignation statement should also be required to be submitted to the company and the company should be required to make the statement available to the shareholders. In terms of the content of the statement, the CLRC is of the view that the statement on ceasing to hold office must be worded in such a way so as to state the reasons for the resignation or removal or where the auditor considers that there are no circumstances in connection with his ceasing to hold office that need to be brought to the attention of members or creditors of the company.

Members of the company should be furnished with a statement of the reason for ceasing to hold office especially in relation to the removal of an auditor or his resignation in order to promote greater transparency and good corporate governance practices. This will resolve problems in relation to the rights of an auditor to resign whilst ensuring that there is sufficient information given to the company and via the regulatory authority, to the public of the reasons for the auditor’s resignation or the auditor’s refusal of reappointment.

The auditor for both public and private companies

It is recommends that the existing requirement as to the appointment of an auditor for both public and private companies should be retained if the mandatory audit is retained. However, if audit or AGM is no longer required for private companies, the auditors are to be appointed by directors if shareholders do not appoint them and the duration of appointment of auditors is in accordance to the terms of appointment or until they are removed by shareholders at a general meeting or until they resign.

Furthermore, in the case of the resignation of auditors, the current statutory provision that requires the resignation to be effective upon the appointment of a new auditor and only if the resignation is made at the general meeting, should be deleted. The effective date of resignation would be at the end of 21 days from the time the notice is deposited with the company. The directors must proceed duly within 21 days from the date of the deposit of a notice of resignation to convene a meeting for a day not more than 28 days after the date on which the notice convening the meeting is given.

Every director who failed to take all reasonable steps to secure that a meeting was convened as mentioned above is guilty of an offence and liable to a fine. Next, where the auditor resigns, the auditor should be required to submit the resignation statement to the company in addition to the duty to inform the regulators upon ceasing to hold office as the auditor and the company should be required to provide the shareholders with the statement.

Conclusion

The auditor is required to either state that there are no circumstances connected with his or her resignation that need be brought to the attention of members or creditors of the company, or to set out what are the circumstances for his resignation to be circulated by the company. On the other hand, the existing provision on the removal of auditor is to be retained. Lastly, there should not be a codification of the mandatory rotation of audit firms and that rules relating to mandatory audit rotation should continue to be a matter of best practice.

Cite this page

Removal of Auditor. (2020, Jun 02). Retrieved from http://studymoose.com/removal-of-auditor-new-essay

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