Corporate and Other Laws · Audit and Auditors

Rotation of Auditors and Removal, Resignation (Sections 139 and 140)

Updated 4 October 2026 · Fact-checked

Rotation limits how long one auditor can stay: for listed and prescribed companies, an individual gets one five-year term and a firm two five-year terms, then a five-year gap. Removal needs a special resolution plus Central Government approval. Resignation needs a statement filed within 30 days. Answer with provision, facts, conclusion.

Understand Rotation of Auditors and Removal, Resignation

A company's auditor checks the accounts on behalf of members. If the same auditor stays for decades, the relationship can become too comfortable and independence can suffer. Section 139(2) addresses this by forcing a change after a fixed period for certain companies.

The rotation rule applies to a listed company and to companies of a class prescribed by rules. Do not say it applies to every company. For these companies, an individual auditor cannot be appointed or re-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. Under section 139(1), each term runs from the conclusion of the AGM at which the auditor is appointed till the conclusion of the sixth AGM, counting that meeting as the first. With annual AGMs, that is five consecutive years. After completing the term, the individual or firm is not eligible for re-appointment in the same company for five years. This gap is the cooling period.

There is one more anti-capture rule. It is the further proviso to section 139(2), which follows provisos (i) and (ii), and it works as on the date of appointment. Because it sits within section 139(2), it applies only to listed companies and the prescribed classes of companies, not to every company. Take an audit firm whose tenure in the company expired immediately preceding the financial year. No other audit firm having a common partner with that firm can be appointed as auditor of the same company for a period of five years. Also, members may resolve that the auditing partner and team be rotated at intervals they decide, or that the audit be done by more than one auditor. For this Chapter, "firm" includes an LLP, and "appointment" includes re-appointment.

Rotation does not stop a company removing an auditor earlier, nor stop an auditor resigning. Both are allowed, but with safeguards. To remove an auditor before the term ends, the company needs a special resolution and the previous approval of the Central Government, and the auditor must get a reasonable opportunity of being heard. The law protects the auditor because a company should not remove a firm just because it reported unpleasant facts.

An auditor who resigns must file a statement in the prescribed form (Form ADT-3) with the company and the Registrar within 30 days of resignation, giving reasons and relevant facts. For Government companies under section 139(5), the statement also goes to the CAG. If the auditor does not file it, section 140(3) imposes a penalty of the lower of ₹50,000 or the auditor's remuneration. If the failure continues, a further ₹500 per day applies after the first day, up to a maximum of ₹2,00,000. Finally, special notice is needed for an AGM resolution to appoint someone other than the retiring auditor, or to say the retiring auditor will not be re-appointed. This lets the retiring auditor make a written representation.

Key rules to remember

Rotation of individual auditor: Individual: maximum 1 term of 5 consecutive years; then 5-year gap; Section 139(2)(a). Applies to listed companies and prescribed classes of companies. A term runs from the conclusion of the appointing AGM till the conclusion of the sixth AGM (section 139(1)).
Rotation of audit firm: Firm: maximum 2 terms of 5 consecutive years (10 years); then 5-year gap; Section 139(2)(b). A firm includes an LLP. Re-appointment counts as appointment.
Common partner rule: As on the date of appointment, no audit firm having a common partner with the other audit firm whose tenure in the company expired immediately preceding the financial year can be appointed as auditor of that company for 5 years; Further proviso to section 139(2). Because it sits within section 139(2), it applies only to listed companies and the prescribed classes of companies. It is tied to the date of appointment and applies where the other firm's tenure in the company expired immediately preceding the financial year.
Removal of auditor before term ends: Special resolution + previous approval of Central Government + opportunity of being heard; Section 140(1). Ordinary resolution is not enough.
Resignation of auditor: File statement (Form ADT-3) with company and Registrar within 30 days of resignation; Section 140(2). Also file with CAG for companies under section 139(5).
Penalty for not filing the resignation statement: Lower of ₹50,000 or auditor's remuneration; plus ₹500 per day after the first day for continuing failure; maximum ₹2,00,000; Section 140(3): default attracts the lower of ₹50,000 or the auditor's remuneration; continuing failure adds ₹500 per day after the first day, subject to a maximum of ₹2,00,000.
Special notice: Needed to appoint a person other than the retiring auditor, or to say the retiring auditor will not be re-appointed; Section 140(4). Not needed where the retiring auditor has completed five years or ten years as per section 139(2).
Tribunal order on fraud: Auditor acting fraudulently: Tribunal can direct change; auditor ineligible for 5 years; Section 140(5). Central Government application: Tribunal decides within 15 days.

How to solve Rotation of Auditors and Removal, Resignation questions

Use this method for any question on rotation, removal, resignation or special notice. Identify the type of company first, because the rotation rule depends on it.

1Read the facts and identify whether the issue is rotation, removal, resignation, special notice or a Tribunal order.
2Check the company type. For rotation, confirm whether it is a listed company or a prescribed class. If it is neither, section 139(2) does not apply.
3Check the auditor type: individual (one term of five years) or firm (two terms of five years). Count consecutive years, including re-appointments.
4For rotation, check the five-year cooling period and the common partner rule (the further proviso to section 139(2), tested as on the date of appointment).
5For removal, check three things: special resolution, previous Central Government approval, and a hearing for the auditor.
6For resignation, check the 30-day filing of the statement with the company and the Registrar, and the penalty if the auditor defaults.
7For special notice, check whether the resolution replaces the retiring auditor or bars re-appointment, and whether the five-year or ten-year exception applies.
8Write the answer as provision, facts, conclusion. Quote the section number only when you are sure of it.

Quickest way: Number-first approach for MCQs and written answers

When to use it: Use this when time is short. Most MCQs test a number or the type of resolution.

Fix the numbers: individual 1 term x 5 years; firm 2 terms x 5 years; gap 5 years; resignation statement 30 days.
Fix the resolution type: removal needs a special resolution plus Central Government approval.
In an MCQ, eliminate options that say ordinary resolution, or that apply rotation to all companies.
For a written answer, use three short parts: Provision (rule in a line), Facts (apply the numbers to the case), Conclusion (one-line verdict).
Write the section numbers 139(2) and 140 in the answer to pick up step marks.

Common mistakes in Rotation of Auditors and Removal, Resignation

Applying rotation to every company
Students remember the numbers but forget the scope.
Fix: Section 139(2) applies to listed companies and prescribed classes only. Check this first.
Writing that a firm gets one five-year term, or that an individual gets two
The two limits are mixed up.
Fix: Individual: one term. Firm: two terms. Think 'firm = two' because a firm has partners.
Saying an ordinary resolution removes an auditor
Appointment is done by ordinary resolution in practice, so students assume removal is similar.
Fix: Removal before term needs a special resolution and previous Central Government approval, after a hearing.
Forgetting Central Government approval for removal
Students focus on the members' resolution only.
Fix: Always write both requirements: special resolution and previous approval of the Central Government.
Mixing the time limits for resignation
Several 30-day and 15-day periods appear in the same section.
Fix: For resignation, the statement is filed within 30 days of resignation. The 15-day period is for filing notice of an appointment with the Registrar.
Treating special notice as required for every change of auditor
Students ignore the exception.
Fix: No special notice is needed where the retiring auditor has completed the five-year or ten-year tenure under section 139(2). Otherwise it is needed at the AGM.

Worked examples

Example 1

A listed company appointed M/s Rao & Co., a partnership firm, as auditor at its AGM in 2015 for five years. It was re-appointed at the 2020 AGM for another five years. The company wants to re-appoint the firm again at the 2025 AGM. Advise.

Show the solution

Provision: under section 139(2)(b), a listed company cannot appoint or re-appoint an audit firm for more than two terms of five consecutive years.
Note on terms: under section 139(1), each term runs from the conclusion of the AGM at which the firm is appointed till the conclusion of the sixth AGM, counting that meeting as the first. With annual AGMs, each term is five consecutive years.
Facts: the first term covers the 2015 AGM to the 2020 AGM. The second term covers the 2020 AGM to the 2025 AGM. Together the two terms cover ten years, ending at the conclusion of the 2025 AGM.
The company is listed, so the rotation rule applies.
A fresh appointment of the firm at the 2025 AGM would be a third term, because both permitted terms have ended by then. Section 139(2)(b) allows only two terms, so this third term is barred.
Under proviso (ii) to section 139(2), once the firm has completed its two terms, it is not eligible for re-appointment in the same company for five years from the completion of that term.
Conclusion: the company cannot give the firm a third term at the 2025 AGM. The firm becomes eligible again only after five years from the end of its second term.

Answer: The re-appointment is not permitted. M/s Rao & Co. has used its two terms of five consecutive years: the first covers the 2015 AGM to the 2020 AGM and the second covers the 2020 AGM to the 2025 AGM. A fresh appointment at the 2025 AGM would be a third term, which section 139(2)(b) bars, and the firm is eligible again only after five years from the end of the second term.

Example 2

Delta Ltd., an unlisted company, wants to remove its auditor before the term ends. The board passed a resolution and the members passed an ordinary resolution. The auditor was not told. Is the removal valid? State the correct procedure.

Show the solution

Provision: under section 140(1), an auditor appointed under section 139 can be removed before the term ends only by a special resolution, after previous approval of the Central Government.
Facts: the members passed only an ordinary resolution, so the resolution requirement is not met.
No Central Government approval is mentioned, so that requirement is also not met.
The proviso requires that the auditor be given a reasonable opportunity of being heard before action is taken. The auditor was not told, so this is also breached.
Correct procedure: (1) apply to the Central Government for approval in the prescribed manner; (2) give the auditor a reasonable chance to be heard; (3) pass a special resolution at a general meeting.
Conclusion: the removal is not valid.

Answer: The removal is invalid. It needs a special resolution, previous Central Government approval and a hearing for the auditor. An ordinary resolution without approval or hearing does not meet section 140(1).

Exam tips

Learn the numbers as a set: 5 years, 2 terms, 5-year gap, 30 days, ₹50,000, ₹2,00,000. These are the usual MCQ targets.
In case studies, first check whether the company is listed or a prescribed class. Many answers turn on this one fact.
Count consecutive years carefully, and remember that re-appointment counts as appointment.
Write the resolution type exactly: special resolution for removal, and add Central Government approval.
Keep answers in provision, facts, conclusion format. Give the section number only for rules you are sure about, such as 139(2) and 140.

Practice questions from Audit and Auditors

Rotation of Auditors and Removal, Resignation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Rotation of Auditors and Removal, Resignation: frequently asked questions

Does auditor rotation apply to all companies?

No. Section 139(2) applies to listed companies and companies of classes prescribed by rules. For other companies, the rotation limits do not apply by this sub-section.

What is the cooling period after an auditor completes the rotation term?

Five years. An individual or firm that has completed its term is not eligible for re-appointment as auditor in the same company for five years from the completion of the term.

How does an auditor resign under section 140, and what if the statement is not filed?

The auditor files a statement in the prescribed form (Form ADT-3) with the company and the Registrar within 30 days of resignation, stating the reasons and relevant facts. For companies under section 139(5), the statement is also filed with the CAG. Under section 140(3), default attracts the lower of ₹50,000 or the auditor's remuneration, and continuing failure adds ₹500 per day after the first day, up to ₹2,00,000.

Can a company remove its auditor by an ordinary resolution?

No. Removal before the end of the term needs a special resolution and the previous approval of the Central Government. The auditor must also get a reasonable opportunity of being heard.

When is special notice required for changing an auditor?

Special notice is needed for an AGM resolution appointing someone other than the retiring auditor, or saying the retiring auditor will not be re-appointed. It is not needed where the retiring auditor has completed the five-year or ten-year tenure under section 139(2).