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NFRA has Superior Powers over ICAI for Professional Misconduct - NCLAT

Posted Date : 05-Dec-2023 , 07:12:34 am | Posted By CASANSAAR print Print
The National Financial Reporting Authority (NFRA) has superior and overriding powers over the Institute of Chartered Accountants of India (ICAI) in matters relating to professional misconduct of chartered accountants (CAs), the National Company Law Appellate Tribunal (NCLAT) has ruled in a judgment while affirming the punishment imposed on four auditors, who conducted the audit of the 17 branches of the scam-hit Dewan Housing Finance Limited (DHFL) between 2014 and 2018.

The four auditors, who are practising CAs and worked for the firm K Varghese & Co that was assigned the audit work of DHFL branches, were saddled with a penalty of ?1 lakh each, besides debarment for one year from being appointed as auditors or from undertaking any audit in respect of any company or body corporate, by the NFRA earlier this year.

Underlining that it was the first case on professional misconduct by auditors before the NCLAT, the tribunal bench led by justice Rakesh Kumar Jain declared that an errant CA cannot question the jurisdiction of the NFRA on the grounds that only the ICAI is authorised to take disciplinary action against her.

“In terms of the Companies Act, 2013 and NFRA Rules, 2018, over important and serious matters especially involving the large and alleged accounting or financial frauds, or matters of public interest, etc, NFRA can suo motu initiate investigation or take for investigating and ICAI will cease to exercise such disciplinary jurisdiction,” said the bench, which also comprised technical member Naresh Salecha.

The NFRA has the power to investigate the professional misconduct of the auditors, said the tribunal, adding if NFRA starts investigating any case, no other institution has the power to continue or initiate any parallel proceeding. The NFRA, which was constituted in the wake of the infamous Satyam scandal of 2009, acts as an independent regulatory body for improving transparency and reliability of financial statements and information of companies in India after a statutory audit by CAs.

“This reduces the power of ICAI to act against the professional wrongdoing of its members as stipulated in Section 132 of the Companies Act...we may conclude the NFRA has been consciously and deliberately given superior authority over ICAI on oversight of auditors and in disciplinary matters,” it said. Section 132 stipulates the constitution of the NFRA to provide for matters relating to accounting and auditing standards under the 2013 Act.

In upholding NFRA’s penalty orders against the four CAs, the tribunal brushed aside their defence that peer-review certification from ICAI for the financial year in question, 2017-18, established that their job was satisfactory and that they conducted the audit work in accordance with Standards of Auditing (SAs).

Advocate Abhishek Gupta called it an “epochal judgment” that underscores the significance of discipline and decorum amongst the CA community. “The NCLAT appears to have been impelled by the necessity of an independent regulatory body and the larger public interest in keeping a check on the accounting and auditing functions,” said the Gupta, who specialises in corporate litigation.

In its 156-page judgment, the NCLAT said that SAs are part of the law of the land and are required to be mandatorily complied with from the date of their respective applicability, while conducting statutory audits and therefore, the NFRA shall have the authority to retrospectively initiate its investigation.

Elaborating on this, the tribunal further ruled on yet another point of law, stating that the NFRA can initiate an investigation even for the matters of misconduct that were committed prior to October 24, 2018, when the rules and powers of the authority were notified.

If a new law is made to take care of known wrongs for the benefits of society as a whole, the NCLAT said, the express provision of retrospective application in new law may not be required and necessary implication need to be made out from the language employed.

The tribunal rejected the CAs’ contention that their role was limited to the audit of a few branches and hence, they cannot be saddled with a larger liability. “To sum up the role of branch auditor, though limited primarily to the branch, however, is critical for overall audit of the company and the auditors of the branch cannot absolve his responsibilities. We cannot overlook the fact that the allegations of fraud involving ?31,000 crore by DHFL, including banking fraud of about ?3,700 crore by directors of DHFL, happened and the auditors clearly failed in their duties,” it held.

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