Appointment of Auditor in Section 8 Company

In a Section 8 Company, the Board of Directors appoints the first auditor shortly after incorporation, following the guidelines of the Companies Act, 2013. If the board does not appoint the auditor, the responsibility shifts to the members at an extraordinary general meeting. The auditor must be a practising Chartered Accountant, which ensures financial transparency and legal compliance for the non-profit organisation. In this article, you will learn about the appointment of auditor in Section 8 company.

What is a Section 8 Company?

A Section 8 Company is a special type of non-profit organisation registered under Section 8 of the Companies Act, 2013 in India. It is formed to promote charitable objectives such as education, art, science, sports, environmental protection, social welfare, and similar causes. The key feature of a Section 8 Company is that it does not distribute profits among its members. Instead, all earnings and income must be used to achieve the organisation’s stated social or charitable goals.

These companies enjoy various benefits such as tax exemptions, relaxed compliance norms, and a professional structure. Though they operate without profit motives, they must follow legal standards like any other registered company and are regulated by the Ministry of Corporate Affairs (MCA).

Who Can Be Appointed as Auditor in a Section 8 Company?

The following details include who can be appointed as an auditor in a Section 8 company:

• The auditor must be a Chartered Accountant (CA) holding a valid Certificate of Practice (COP) under the Chartered Accountants Act, 1949.
• The CA should be independent and must not have any direct or indirect interest in the company.
• An audit firm can also be appointed if it has one or more qualified Chartered Accountants as partners.
• The auditor or audit firm must meet the eligibility conditions mentioned in Section 141 of the Companies Act, 2013.
• The Board of Directors can appoint the auditor or, if they fail to do so, by the members in an Extraordinary General Meeting (EGM).
• The appointment must be reported to the Ministry of Corporate Affairs (MCA) through appropriate e-filing.

The following persons/firms cannot be appointed as auditors:

• Those who are employees, officers, or partners in the company.
• Those holding shares or securities in the company.
• Those who have business relationships with the company that affect independence.

Those who have been disqualified by law or regulatory authority.

Types of Auditor Appointments in a Section 8 Company

Different types of auditor appointments are required at different stages of a company’s life cycle to ensure accurate and independent financial reporting. They are mentioned as follows:

First Auditor

• Appointed by the Board of Directors after company incorporation.
• The auditor must be appointed within 30 days from the company’s date of incorporation.
• If the board fails, members appoint the auditor at an EGM.
• Holds office until the first Annual General Meeting (AGM).

Subsequent/Statutory Auditor

• Appointed in the first AGM by the members.
• Can hold office for a term of five years, subject to ratification (if required).
• Must be a Chartered Accountant in practice.

Casual Vacancy Auditor

• Appointed if the current auditor resigns, dies, or is removed before the term ends.
• If caused by resignation, the appointment must be approved in a general meeting within three months.

Internal Auditor

• Appointed to assess internal controls and operational efficiency.
• Not mandatory for all companies, but recommended for better governance.

Auditor’s Role in a Section 8 Company

The following details include the auditor's role in a section 8 company:

1. Examine Financial Statements

The auditor checks all the books of accounts, which include the income, donations, expenses, grants, assets, and liabilities, to make sure everything is recorded properly and honestly. They verify if the financial statements (like balance sheet, income & expenditure statement, and cash flow) truly reflect the financial position of the company.

2. Ensure Legal Compliance

The auditor ensures that the Section 8 company is following all the rules under the Companies Act, 2013, especially sections related to all the below-mentioned details:

• Maintenance of books of accounts (Section 128)
• Audit of accounts (Section 139 and 143)
• Filing with the Registrar of Companies (ROC)

They also make sure the company is not violating the restrictions imposed on Section 8 companies, like not distributing profits to members.

3. Detect and Prevent Fraud

Auditors are responsible for identifying any fraud or financial irregularities in the company’s transactions. If they find any signs of fraud, they must report it to the Central Government, as per Section 143(12) of the Companies Act.

4. Issue Audit Report

After examining the accounts, the auditor prepares an Audit Report, stating whether the company’s accounts are in order and compliant with the law. This report is submitted to the members of the company during the Annual General Meeting (AGM).

5. Assist in ROC Filings

Section 8 companies must file annual returns and financial statements (in Form AOC-4 and MGT-7) with the Registrar of Companies. The auditor helps in preparing and verifying these filings to avoid legal trouble.

6. Maintain Transparency

Since Section 8 companies receive donations, government funds, or CSR grants, the auditor’s role is to build public trust by ensuring fair and clean financial practices.

Appointment of Auditor in Section 8 Company

Let us discuss the appointment of auditor in Section 8 company in two methods, as mentioned below:

Appointment of the First Auditor in Section 8 Company

Here is the process for the appointment of the first auditor in Section 8 company:

Step 1: Understand the Legal Provision

• According to Section 139(6) of the Companies Act, 2013, the Board of Directors must appoint the first auditor of the company within 30 days from the date of incorporation.
• This rule applies to all types of companies, including Section 8 Companies, unless specifically exempted under notifications or rules by the Ministry of Corporate Affairs (MCA).

Step 2: Hold a Board Meeting

The company must call a Board Meeting within the specified 30-day period to formally pass a board resolution appointing the first auditor. This decision must be recorded in the minutes of the meeting.

The auditor must be:

• A qualified Chartered Accountant in practice.
• Independent and not disqualified under Section 141 of the Companies Act.

Step 3: Consent from the Auditor

• Give written consent to act as the auditor.
• Confirm that they meet all eligibility requirements under the law.

This consent must be kept on record and submitted if required by regulatory authorities.

Step 4: File Form ADT-1 (Not Mandatory for First Auditor)

• For first auditor appointments, fieldForm ADT-1 with the MCA is not mandatory. However, many companies voluntarily file it for documentation and legal clarity.
• From the second auditor appointment onwards, filing Form ADT-1 is mandatory within 15 days of the appointment.

Step 5: In Case of Board’s Failure to Appoint

• If the Board of Directors fails to appoint the first auditor within 30 days, the responsibility shifts to the members of the company.
• The shareholders must then appoint the auditor at an Extraordinary General Meeting (EGM) within 90 days from the date of incorporation.

Step 6: Tenure of the First Auditor

Once appointed, the first auditor will hold office until the conclusion of the first Annual General Meeting (AGM). After that, the company must appoint a regular auditor as per Section 139(1) of the Act.

Appointment of a Subsequent Auditor in a Section 8 Company

The details below include the process for the appointment of a subsequent auditor in a section 8 company:

Step 1: Hold a Board Meeting

The company must first call a Board Meeting to:

• Approve the draft notice of the Annual General Meeting (AGM).
• Fix the date, time, and venue for the AGM.
• Approve the appointment of the new auditor subject to member approval.

Legal Basis: Section 139(1) of the Companies Act, 2013.

Step 2: Issue Notice of AGM

Send a notice of AGM to all members, directors, and auditors at least 21 clear days before the meeting, as required under Section 101 of the Act. The notice must clearly mention the agenda of appointing a subsequent auditor.

Step 3: Pass an Ordinary Resolution in the AGM

At the AGM, members must approve the appointment of the new auditor by passing an Ordinary Resolution under Section 139(1). The auditor is usually appointed for a 5-year term, subject to ratification (if required) at every AGM.

Step 4: File Form ADT-1 with ROC

Within 15 days of the AGM, the company must file Form ADT-1 with the Registrar of Companies (ROC) to inform of the appointment of the auditor. Filing ADT-1 is mandatory, even if the appointment is for a Section 8 Company.

Form ADT-1 must include:

• Auditor’s details (Name, PAN, Membership Number)
• Period of appointment
• Board and AGM resolutions
• Consent and eligibility letter from the auditor (under Section 141)

ROC Filing Fees depend on the company's authorised capital.

Documents Required for the Appointment of an Auditor

Here is the list of documents needed for the appointment of auditor in Section 8 company:

• Board Resolution for recommending the auditor
• Notice of AGM (Annual General Meeting)
• Shareholders' Resolution passed in AGM
• Consent Letter from the proposed auditor (in writing)
• Eligibility Certificate under Section 141 of the Companies Act, 2013
• Form ADT-1 (filed with the Registrar of Companies)
• Appointment Letter issued to the auditor
• Certificate from the Auditor confirming compliance with limits on the number of audits
• PAN Card and Membership Number of the auditor
• Copy of Board Meeting Agenda and Minutes (optional but recommended)
• Copy of AGM Agenda and Minutes (optional but recommended)

Penalty for Non-Compliance

According to Section 8(11) of the Companies Act, 2013, if a Section 8 Company violates its terms, the penalties can be as follows:

1. Revocation of License

The Central Government can cancel the Section 8 license if:

• The company acts against its objectives
• It fails to comply with legal rules

After cancellation, it will lose all Section 8 benefits and be treated like a normal company.

2. Fine for the Company

• A penalty of Rs. 10 lakh to Rs. 1 crore can be imposed on the company.
• This is based on the severity and duration of the violation.

3. Penalty for Directors and Officers

Every director and officer responsible may face:

• A fine between Rs. 25,000 and Rs. 25 lakh
• Imprisonment for up to 3 years
• Both fine and jail, depending on the case

4. Restitution

The company may be asked to return funds or property used improperly or to compensate affected parties.

Non-compliance in a Section 8 Company is not just a mistake, but a legal risk. Losing your license, heavy fines, or even jail can follow. Stay legally sound, follow the rules, and protect your mission. A little care ensures your good work continues without interruption. This blog provided you with detailed information on the appointment of auditor in Section 8 company. To get assistance and support in filing a Section 8 company registration from professional experts, contact Online Legal India.