Changing Auditors: Removal, Resignation and Special Notice

Nobody changes auditor for a neutral reason. Either the fee moved, the group restructured, the relationship broke, or somebody did not like the questions being asked. The Companies Act 2016 assumes the last of those and builds the whole procedure around giving the departing auditor a channel to say so — to the members, and to the Registrar.

That is why a removal is not a board decision, and why the file at SSM ends up telling a story.

Removal: the 28-day clock

Section 276(1) allows members to remove an auditor from office at any time, by ordinary resolution at a general meeting, in accordance with s.277. Section 276(3) closes the alternatives: an auditor may not be removed before the expiration of his term except by a resolution under that section. Section 276(2) preserves any compensation or damages payable for termination of the appointment.

The procedural spine is special notice.

Step	Who	When	Section
Special notice of the intended resolution given to the company	A member	At least 28 days before the meeting	s.322(1)
Copy sent to the auditor proposed to be removed and to the Registrar	Company	Immediately on receipt	s.277(2)
Written representation of reasonable length, with a request to circulate	Auditor	Within 7 days of receiving the special notice	s.277(3)
Copy of the representation sent to every member entitled to notice	Company	With the meeting notice	s.277(4)
Notice of the resolution given to members	Company	With the notice of meeting; or at least 14 days before by advertisement if not practicable	s.322(3), s.322(4)
Copy of the representation sent to the Registrar, and to the stock exchange if quoted	Auditor	Within 7 days of making the representation	s.284
Notice to the Registrar that the resolution was passed	Company	Within 14 days	s.278(1)

Two of those rows are the ones companies get wrong.

The Registrar gets the special notice at the same time as the auditor. Section 277(2) is a single obligation covering both recipients, and it says immediately. The regulator therefore knows a removal is proposed before the meeting is held, not after.

The auditor files independently. Section 284 puts the duty on the auditor, not the company, to send the written representation to the Registrar within seven days. The company cannot suppress it by not filing.

If the company fails to circulate the representation, s.277(5) lets the auditor require it to be read out at the meeting, without prejudice to being heard orally. The only escape is s.277(6): on application by the company or an aggrieved person, the Court may relieve the company of circulation if satisfied the auditor is using the section to secure needless publicity, or that the matter is defamatory, or on other grounds the Court thinks reasonable.

Section 322(5) contains a trap in the other direction. If the company calls a meeting for a date 28 days or less after the special notice was given, the notice is deemed properly given even though it was short. A board cannot defeat a removal by rushing the meeting.

Resignation: 21 days, and two seven-day filings

Resignation is simpler and faster. Under s.281(1) an auditor resigns by giving written notice to the company at its registered office. Not to the finance manager, not by email to a director — the registered office is the statutory address, which is one reason the registered office obligation matters.

Section 281(2) ends the term of office 21 days after the notice is given, or on the date specified in the notice. An auditor who wants a longer runway must say so in the notice.

Then two separate seven-day filings run:

• s.282(1) — the company sends a copy of the notice to the Registrar within seven days of receiving it. The company and every officer commit an offence if it does not.
• s.284 — the auditor sends the statement of circumstances connected with the resignation to the Registrar within seven days of the notice, and to the stock exchange if the shares or debentures are quoted.

For a public company, s.283 adds real teeth where the resignation notice is accompanied by a statement of circumstances. The auditor may serve a signed requisition calling on the directors to convene a general meeting to receive the explanation. The directors must hold that meeting within 28 days of receiving the requisition, and every director who fails to take all reasonable steps to secure it commits an offence under s.283(11). The auditor may require the statement to be circulated, and retains the s.285 right to attend and be heard.

Appointing the replacement

The vacancy does not fill itself.

For a private company using a written resolution, s.279 applies where the effect is to appoint a person in place of an outgoing auditor. The company must send a copy of the proposed resolution to both the proposed appointee and the outgoing auditor. The outgoing auditor then has 14 days from receiving it to make a written statement explaining the circumstances connected with the resignation, and may require it to be sent to every member. Where that happens, the circulation period under s.303(3) stretches from 21 days to 28 days.

Where the appointment is made at a meeting instead, s.280 requires special notice in four situations — broadly, where no appointment period or AGM has passed since the outgoing auditor ceased to hold office by resignation or removal, or where one has passed and no auditor was appointed. On receiving that notice the company must immediately send a copy to the proposed appointee.

And under s.269(1)(a), the incoming auditor does not take office until the previous auditor ceases to hold office. Overlapping the two, other than as joint or additional auditors under s.269(2), does not work.

Professional clearance: the step that is not in the Act

Before any of this matters commercially, the incoming firm has to be willing to take the job.

R320.4 MY of the MIA By-Laws is mandatory and specific: in the case of a financial statement audit engagement, no member in public practice shall accept nomination without enquiring from the existing auditor whether there is any professional or other reason for the proposed change of which he should be aware — and, if there is, requesting all the details necessary to reach a decision.

Appendix II to the By-Laws sets the mechanics:

1. The existing accountant should reply in writing normally within 14 working days, saying whether there are professional reasons not to accept, and disclosing the information if the client has given permission — or disclosing that permission was refused.
2. If no reply arrives after 14 working days, the proposed accountant sends a reminder by registered post or by hand.
3. If there is still no reply within 14 working days of the reminder, the proposed accountant tries other means, including enquiries of third parties or background checks on senior management.
4. If the information is not obtained, or permission to disclose was refused, the proposed accountant must consider whether it is appropriate to accept at all.
5. On accepting, the proposed accountant informs the existing accountant in writing, by registered post or by hand.

Under 320.5 A1 the proposed accountant will usually need the client’s permission, preferably in writing, to open the discussion. Refusing that permission is the loudest thing a client can do. It does not stop the change; it tells the incoming firm that something is being withheld, and step 3 of the appendix tells them to go looking anyway.

Budget two to six weeks for clearance in a real timetable, and longer if fees are outstanding — an unpaid fee is a common reason a clearance reply is unhelpful.

Why a mid-audit resignation is a red flag to your banker

An auditor who resigns before signing has usually concluded one of three things: that the evidence needed is not going to arrive, that the representations offered are not reliable, or that continuing would breach an ethical requirement. All three are worse than a qualified opinion, because a qualification at least tells you what the problem was.

The visible artefacts are the s.282 notice on the SSM file and the s.284 statement of circumstances lodged by the auditor. Both are on the public record. Whatever the company later says about a fee disagreement, a credit officer will read the file.

Add the reporting duties that sit on the auditor throughout. Section 266(8) requires the auditor to report a breach of the Act to the Registrar in writing where the matter has not been and will not be adequately dealt with by comment in the report or by raising it with the directors. Section 266(9) goes further for public companies and companies controlled by them, requiring a written report to the Registrar where a serious offence involving fraud or dishonesty is suspected. Failure to comply carries up to five years imprisonment or a fine up to RM3 million under s.266(13). An auditor under that kind of pressure resigns rather than accommodates.

Most facility agreements also carry a notification covenant on a change of auditors. Check it before the resolution is passed, not after.

Common mistakes

• Passing a board resolution to remove the auditor. Only members can remove, and only under s.276 with special notice.
• Sending the special notice to the auditor but not the Registrar, contrary to s.277(2).
• Counting the auditor’s seven days from the meeting date. It runs from receipt of the special notice, under s.277(3).
• Serving resignation on a director instead of the registered office, which is not what s.281(1) requires.
• Missing the 14-day s.278 filing after the removal resolution is passed.
• Appointing the incoming firm before the outgoing firm ceases to hold office, contrary to s.269(1)(a).
• Refusing professional clearance permission, which tells the incoming firm far more than the answer would have.
• Changing auditor to fix a disagreement about an accounting treatment. The new firm will ask why, and the answer arrives through the clearance letter.

What’s next

If the change is fee-driven, it helps to know what actually determines an audit fee in Malaysia — and why the schedule still circulating online has not been in force for years.