The National Company Law Appellate Tribunal (NCLAT) has upheld the authority of the National Financial Reporting Authority (NFRA) to retroactively oversee and take action against Chartered Accountants for misconduct predating its establishment in October 2018. 

This means that NFRA, the country’s sole independent audit regulator, can penalise auditors and audit firms for their misdeeds that occurred before October 2018.

Not only that, even for auditor misconducts prior to October 2018 and proceedings already underway by CA Institute, the matter would be in the exclusive domain of NFRA, NCLAT has ruled.

In their 156 page order, Rakesh Kumar Jain, Member (Judicial), and  Naresh Salecha, Member (Technical) has now dismissed all the four Appeals of different Branch Auditors of beleaguered Dewan Housing Finance Ltd (DHFL) and ruled that there were no errors on the NFRA disciplinary orders against them. 

The NFRA orders against the four DHFL branch auditors related to financial year 2017-18.

In arriving at this conclusion on retrospectivity, the NCLAT has relied on Supreme Court judgements in SEBI vs Classic Credit as also in New India Assurance vs Shanti Misra, wherein the Apex court had held that change in forum due to change in law has no bar on being implemented with retrospective effect.

“After taking into consideration the background for forming NFRA, the judgement of the Apex court, proven scams, need to restore shaken confidence of public and investors at large and prevent any adverse impact on Indian economy, we hold that NFRA has clear and required retrospective jurisdiction over the alleged offences by delinquent chartered accountants for period prior to formation of NFRA or prior to coming into effect of relevant portion of section 132 of Companies Act”, said the NCLAT order.

NFRA had on each of the four appellants imposed a penalty of ₹1 lakh and debarred them for a year from undertaking any audit for their professional misconduct in the DHFL branch audit work.

The four appellants in the four appeals were different Engagement Partners (EP) of K Varghese & Co, an audit firm that had branch audit mandate for different branches of DHFL. All these four appeals, which related to audits of 17 branches of DHFL, were clubbed by NCLAT for its verdict.

In the landmark ruling, NCLAT has held that NFRA has (as regards listed entities and certain other Companies) superior and overiding powers in matters relating to professional misconduct of the chartered accountants in terms of Section 132 of Companies Act 2013. 

This is even as disciplinary jurisdiction over CAs remain with both Institute of Chartered Accountants of India (ICAI) and NFRA on concurrent basis.

NFRA has been consciously and deliberately given superior authority over ICAI on oversight of auditors and in disciplinary matters in Sec 132, the NCLAT ruling added.

This NCLAT ruling is significant as it is probably the first time that it is pronouncing a verdict on the issue of professional misconduct of an auditor.

In this ruling, the NCLAT has rejected all defences of the four branch auditors and also ruled that Standards of Auditing applies to branch audits as well. It has held that Standards of Auditing are mandatory and not mere advisory or a Guidance Note to auditors.

NCLAT has held that the role of branch auditor, though limited primarily to the branch, is crucial 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 the DHFL including banking fraud of about ₹3,700 crore by Directots of DHFL happened and the Auditors clearly failed in their duties”, NCLAT said.

NCLAT also upheld the penalty amount and debarment period for the four DHFL branch auditors, stating that it cannot be considered excessive given the “fact that there has been fraud in DHFL of ₹31,000 crore and auditors can’t pretend to be ignorant of what was happening”.

It has also held that there was no violation of principles of natural justice in NFRA orders due to non-constitution of divisions. 

It is of utmost importance that Auditors realise their responsibilities which are necessary not just to the company but also to public, NCLAT has said.

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