Clarity on the National Financial Reporting Authority’s (NFRA) disciplinary powers has been provided by the Supreme Court. Oversight of audit service quality is mandated to NFRA under Section 132 of the Companies Act, 2013. Challenges to NFRA’s operational structure have been addressed through recent judicial review. Specific directives on managing ongoing disciplinary proceedings have been issued. Significant impact on auditors and firms under NFRA scrutiny is anticipated.
Interim Directive
Judicial direction on NFRA’s disciplinary proceedings has been given following its appeal against a Delhi High Court order. Key points have been outlined by the Supreme Court:
i) Continuation of proceedings is permitted for NFRA against auditors and firms, despite pending Audit Quality Review (AQR) reports or final orders.
ii) Issuance of new final orders in these matters is stayed.
iii) Enforcement of existing final orders passed by NFRA is prohibited temporarily.
Background
The Supreme Court’s review stems from NFRA’s appeal against a Delhi High Court order. Structural concerns within NFRA were raised by the High Court. The absence of independent divisions for audit quality reviews and disciplinary actions was questioned. Principles of natural justice and procedural fairness were linked to this issue. Re-evaluation in specific cases (reportedly 11) was previously directed by the High Court.
NFRA’s Arguments
Arguments defending NFRA’s position were presented before the Supreme Court. Conflict with precedents from the National Company Law Appellate Tribunal (NCLAT) and the Supreme Court was alleged by NFRA regarding the High Court’s view. The Supreme Court’s prior ruling in the DHFL case involving T K Harish, a branch auditor, was cited. Legal inconsistency in another DHFL-related case involving Snehal N Muzoomdar was highlighted.
Implications for Auditors
NFRA’s authority to pursue ongoing investigations and proceedings is upheld by the SC ruling. Issuance and enforcement of final orders are temporarily suspended, creating uncertainty. Auditors and firms under scrutiny await resolution. The separation of NFRA’s investigative and disciplinary functions remains under judicial review.
Close monitoring by the chartered accountants, audit firms, and legal professionals is required as the matter progresses. (TOI)