Section 142 of the Companies Act, 2013 provides that payments made to auditors should be done in a fair and transparent manner. This section mandates that the fees of the auditor, along with other expenses incurred by the auditor in conducting the audit, shall be paid during the general meeting. This is due to the fact that proper oversight of its financial dealings will instill confidence among the shareholders with regard to the audit process. From the appointment of auditors at the initial stages to the specific provisions on the fees, this practice manual details the significant points of Section 142, thus allowing companies to achieve compliance with statutory requirements without compromising the corporate governance standards.

Detailed I Analysis of Section 146 of the Companies Act 2013

Here’s a detailed breakdown of Section 142 of the Companies Act, 2013:

1. Setting the Auditor's Remuneration (Sub-section 1)

• General Meeting Requirement: The remuneration of a company's auditor must typically be determined during a general meeting of the shareholders. This provides transparency, allowing shareholders to have a say in the compensation of the auditor, which reinforces accountability.

• Determination in the Meeting: If not directly set, the manner in which the auditor’s remuneration will be fixed must be outlined in the meeting. This could mean delegating the decision to a committee or establishing a formula or method for setting the remuneration.

• Exception for First Auditor: The Board of Directors is permitted to set the remuneration for the company’s first auditor, which is an exception to the general rule that remuneration must be fixed in a general meeting. This is applicable since the first auditor is appointed by the Board itself and not through the general meeting.

2. Components of the Auditor’s Remuneration (Sub-section 2)

• Inclusion of Expenses: The auditor’s remuneration includes more than just the basic fee. It also covers any reasonable out-of-pocket expenses incurred by the auditor during the audit process. This can include travel expenses, document processing fees, or other costs essential to performing the audit effectively.

• Facility Provision: Any facilities that the company extends to the auditor for the completion of their duties are also part of the remuneration. This might include office space, equipment, or access to company resources needed to conduct the audit.

• Exclusion of Additional Service Fees: If the auditor performs other services for the company (outside the scope of their audit duties), any remuneration paid for these services is not included under the regular audit remuneration. This separation helps maintain transparency in the financial reporting process and preserves the auditor’s independence.

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Illustration of Section 142: Auditor’s Remuneration

ABC Ltd., a company registered in India, appoints an auditor during its annual general meeting (AGM) to review its financial statements. During the AGM, the shareholders discuss the auditor's remuneration, which includes the audit fee, reasonable travel expenses, and any costs for necessary resources provided by the company for the audit.

For this new auditor, the shareholders agree to a fee of INR 5 lakh, which will cover the audit service. Additionally, the shareholders approve reimbursement of any out-of-pocket expenses related to the audit, such as travel and accommodation if the auditor needs to visit branch offices.

However, the Board of Directors decides that the auditor should also assist with a tax consultancy project. For this service, ABC Ltd. pays an additional INR 2 lakh, but this payment is kept separate from the audit remuneration to maintain transparency, as per Section 142.

Later, when ABC Ltd. appoints a new company auditor, the Board of Directors sets the remuneration for the first auditor themselves without needing a shareholder vote, which aligns with Section 142’s allowance for first auditors.

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In Conclusion,

Section 142 of the Companies Act mandates that a company's auditor's remuneration shall be decided during its general meeting or by a process agreed upon while holding that meeting. In the case of the first auditor appointed by the Board, the aforesaid remuneration can be specified by the Board itself. However, the remuneration for the auditors shall cover audit-related out-of-pocket expenses and also any other compensation given by the auditor on demand from the company relating to any additional services provided.

FAQs on Section 142 of the Companies Act 2013

1. Who decides the remuneration of a company’s auditor under Section 142?

Under Section 142, it is proposed that the remuneration of a company's auditor is to be decided upon by the company either through a general meeting, or within the course of such meeting. If the auditor is the first one appointed by the Board, then the Board can decide upon his remuneration.

2. Does Section 142 allow reimbursement of auditors' out-of-pocket expenses? 

Yes, Section 142 requires that remuneration paid to the auditor shall include out-of-pocket expenses incurred in the course of audit work.

3. What if the auditor performs services over and above the regular audit work? 

If the auditor has rendered extra services on the request of the company, extra fees above the regular audit charges are remunerated.

4. Why is Section 142 significant to corporate governance?

It protects clarity and fairness in the determination of remuneration to the auditors as the mechanism guards independence and consolidates confidence in the audit process.

5. Is it the responsibility of the Board to determine the remuneration for the auditor?

No, the Board may only fix the remuneration of the first auditor appointed. The remuneration of all subsequent auditors must be determined by a general meeting or as ordered in such resolution.