Supreme Court upholds NFRA’s authority to probe financial auditor misconduct retrospectively, dismissing appeal against NCLAT ruling. NFRA’s jurisdiction affirmed in significant decision.
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NEW DELHI: The Supreme Court recently made a significant decision regarding the National Financial Reporting Authority’s (NFRA) powers, affirming its authority to investigate allegations of misconduct by financial auditors retrospectively. In a ruling that dismissed an appeal challenging a National Company Law Appellate Tribunal (NCLAT) order, the apex court upheld the NFRA’s jurisdiction.
The Bench of Justices Sanjiv Khanna and Dipankar Datta, in their judgment, emphasized the lack of grounds for the Court to interfere with the December 2023 NCLAT ruling.
The Court’s order, issued on May 17, 2024, succinctly stated-
“We find no valid justification to intervene with the National Company Law Appellate Tribunal’s decree dated December 1, 2023, in Company Appeal (AT) No. 68 of 2023. Consequently, we dismiss the current appeal.”
This order originates from a 2023 verdict by the NCLAT, wherein it rejected multiple appeals filed by four Chartered Accountants (CAs). These individuals had challenged penalties imposed on them by the NFRA due to shortcomings found in their execution of branch audits for Dewan Housing Finance Ltd (DHFL) across seventeen branches of the company.
The NCLAT’s ruling underscores the NFRA’s authority to investigate and take action against auditors retrospectively, a power that has been a subject of debate and legal scrutiny. The NFRA, established under the Companies Act, 2013, has been empowered to oversee compliance with accounting and auditing standards and to ensure the quality of financial reporting. Its retrospective powers have been upheld by the NCLAT, which has now been affirmed by the Supreme Court’s dismissal of the appeal.
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This decision holds implications not only for the parties involved in this particular case but also for the broader financial auditing landscape in India. It reaffirms the regulatory framework’s commitment to maintaining the integrity and transparency of financial reporting, crucial for investor confidence and market stability.
In response to the Supreme Court’s decision, legal experts have expressed varied opinions. Some view it as a necessary step towards reinforcing regulatory oversight, particularly in light of recent corporate governance lapses and financial scandals. Others raise concerns about the retrospective application of regulatory powers, emphasizing the need for clarity and predictability in regulatory enforcement.
While this ruling settles the specific dispute brought before the courts, it also raises broader questions about the balance between regulatory authority and legal certainty. As the NFRA continues to assert its regulatory mandate, stakeholders across the financial ecosystem will closely monitor developments to understand the implications for their compliance obligations and risk management strategies.
The National Financial Reporting Authority (NFRA) imposed penalties on four Chartered Accountants (CAs) for their failure to comply with auditing standards during a branch audit. The NFRA, established to ensure compliance with accounting standards and oversee the quality of audits, found these CAs guilty of accepting branch audit engagements without adhering to the legal requirements under the Companies Act, 2013.
According to the NFRA’s findings, the four CAs were fined Rs.1 lakh each and debarred from conducting audit functions for a year as a consequence of their misconduct. Despite this penalty, the affected CAs contested the NFRA’s orders before the National Company Law Appellate Tribunal (NCLAT), challenging the authority’s jurisdiction in retrospectively investigating their actions.
The core of their argument revolved around the timing of the purported misconduct, which took place during the FY 2017-18, before the NFRA was established in October 2018. They argued that the NFRA did not possess the jurisdiction to retrospectively investigate incidents that occurred prior to its establishment.
However, the NCLAT upheld the NFRA’s decision, affirming its jurisdiction to investigate actions preceding its establishment. In a landmark ruling, the NCLAT asserted the NFRA’s supremacy over the Institute of Chartered Accountants of India (ICAI) in matters concerning auditing standards and professional misconduct.
“We affirm that the NFRA possesses explicit and necessary retrospective jurisdiction over the alleged transgressions committed by errant Chartered Accountants, even for the period preceding the establishment of the NFRA or before the relevant segment of Section 132 of the Companies Act, 2013, became operative.”
-stated the NCLAT.
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Undeterred by the NCLAT’s verdict, one of the affected CAs decided to appeal to the Supreme Court, seeking a reversal of the decision. However, the Supreme Court, through its order dated May 17, dismissed the appeal, thereby upholding the NCLAT’s ruling.
- Representing the appellant, Senior Advocate PH Arvindh Pandian and advocate on record Goutham Shivshankar presented their case before the Supreme Court.
- On the opposing side, Advocate Zoheb Hossain represented the NFRA, reinforcing the authority’s stance on retrospective jurisdiction and the enforcement of audit standards.
Case Title:
Harish Kumar T.K. v. National Financial Reporting Authority
