When a company appoints an auditor, one practical question always comes up — how much will the auditor be paid and who decides that amount?
In India, this is explained in Companies Act, 2013, specifically under Section 142, which talks about auditor remuneration.
Many beginners think the auditor decides the fee themselves. In reality, the company decides it through a specific process. Let’s understand how this works.
Who Decides the Auditor’s Remuneration?
Imagine a company is appointing an auditor for the financial year. The question naturally arises — who fixes the payment?
Under Section 142, the answer depends on whether the auditor is the first auditor or a later (subsequent) auditor.
Remuneration of Subsequent Auditors
In most cases, the auditor who audits the company every year is called a subsequent auditor. For these auditors, the shareholders of the company decide the payment during the general meeting.
In simple words:
- The owners of the company (shareholders) decide how much the auditor should be paid.
- They make this decision when they meet in a formal company meeting.
- Sometimes they may also decide the method of calculating the payment instead of fixing a specific amount.
From practical experience, this system exists to ensure that auditors remain independent from management. If management alone fixed the fee, it could sometimes influence the auditor’s independence.
Remuneration of the First Auditor
Now consider a company that has just been formed.
At the start, the company may not yet have held its first shareholders’ meeting. In that case, someone still needs to appoint an auditor quickly so that financial records can be audited.
Here is where the Board of Directors steps in.
If the auditor is the first auditor of the company, then the Board of Directors fixes the remuneration. This happens because the board appoints the first auditor.
In real life, this is quite common in newly incorporated companies where operations start before the first general meeting happens.
What Is Included in Auditor Remuneration?
When people hear “auditor fee,” they usually think only about the audit charge. But under Section 142, the remuneration can include a few additional things connected with the audit work. Let’s look at what is normally included.
Audit Fee
This is the main professional fee paid to the auditor for examining the company’s financial records.
For example, if a mid-sized company hires an auditor to check its accounts for the year, it may agree to pay ₹1,50,000 as the audit fee. This is the primary component of auditor remuneration.
Expenses Incurred During the Audit
Sometimes auditors have to spend money while conducting the audit. These may include small costs like:
- travel to company locations
- document handling
- administrative costs during audit work
These are often called out-of-pocket expenses. For instance, if an auditor travels to the company’s branch office in another city and spends ₹15,000 on travel and documentation, this amount can also be reimbursed as part of the remuneration arrangement.
Facilities Provided by the Company
In some cases, the company may provide facilities to help the auditor complete their work. For example, office workspace, data access support and administrative assistance.
These facilities can also be considered part of the overall remuneration arrangement linked to the audit work.
What Is NOT Included in Auditor Remuneration?
There is one important limitation beginners often miss. The payment discussed under Section 142 applies only to audit-related work.
If the auditor performs any other service for the company, the payment for that service is not considered part of audit remuneration.
For example, suppose an auditor also helps the company with financial consulting, tax advisory work and special financial reports. The payment for those services is separate and not counted as audit remuneration under Section 142.
This separation exists mainly to maintain clarity in company records and to avoid confusion about the auditor’s core responsibility — auditing the financial statements.
Key Points About Auditor Remuneration (Section 142)
| Topic | Explanation |
|---|---|
| Law governing auditor remuneration | Section 142 of Companies Act, 2013 |
| Who fixes remuneration of subsequent auditors | Shareholders during the general meeting |
| Who fixes remuneration of first auditor | Board of Directors |
| What remuneration includes | Audit fee, expenses during audit, and facilities provided |
| What remuneration does NOT include | Payment for other services provided by the auditor |
| Can engagement letter be signed before finalizing fee? | Yes, fee can be decided later by mutual agreement |
Conclusion
Understanding auditor remuneration under Section 142 of the Companies Act, 2013 is actually quite straightforward once you see how it works in practice.
The company — through either its shareholders or board of directors — decides how much the auditor will be paid. The remuneration usually includes the audit fee and related expenses, but it does not include payment for any other services the auditor may provide.
Frequently Asked Questions About Auditor Remuneration (Section 142)
When beginners first learn about auditor remuneration under Section 142 of the Companies Act, 2013, a few common doubts usually appear. Let’s go through some practical questions that many learners ask.
What is auditor remuneration under the Companies Act, 2013?
Auditor remuneration simply means the payment given to an auditor for performing the audit of a company’s financial records. Under Section 142, this payment usually includes the main audit fee and any expenses the auditor spends while doing the audit work.
Who decides the remuneration of auditors in a company?
In most companies, the shareholders decide the auditor’s remuneration during a general meeting. However, if the auditor is the very first auditor of the company, then the Board of Directors decides the payment because they appoint the first auditor.
What is meant by a first auditor of a company?
The first auditor is the auditor appointed soon after a company is formed. This usually happens before the company holds its first meeting of shareholders.
What is a subsequent auditor?
A subsequent auditor is the auditor appointed after the first auditor’s term ends. Most yearly audits in companies are handled by subsequent auditors appointed by shareholders.
What expenses can be included in auditor remuneration?
The payment can include expenses that the auditor spends while conducting the audit. For example, travel costs, document handling expenses, or other small costs related directly to the audit work.
Why does the law separate audit fee from other services?
The main reason is clarity and transparency. Separating audit work from other services helps maintain trust in the auditor’s independence.
Does a company’s turnover automatically decide the audit fee?
Not always. Turnover gives an idea of the company’s size, but the audit fee usually depends on how complex the company’s financial records are and how much work the audit requires.
Can the Board decide the remuneration of all auditors?
No. The Board usually decides the remuneration only for the first auditor. After that, the shareholders take over the responsibility.
What is an engagement letter in auditing?
An engagement letter is a formal agreement between the company and the auditor. It explains the audit work to be done, responsibilities of both sides, and other basic terms of the audit assignment.
Why is auditor remuneration important in corporate governance?
Auditor remuneration is important because it ensures that auditors are fairly compensated while maintaining transparency and independence in financial reporting.
