Empowered NFRA will keep auditors on their toes

Since its inception in October 2018, the National Financial Reporting Authority (NFRA) has passed more than 50 orders against an eclectic set of audit firms and auditors. A majority of these orders have been against the auditors of IL&FS, Dewan Housing Finance Limited (DHFL) and Café Coffee Day. NFRA’s DHFL orders were issued end-September.

Monetary fines were imposed on branch auditors of DHFL. They were barred from accepting audits for a defined period. Some of the auditors of DHFL had approached the National Company Law Appellate Tribunal (NCLAT) with their principal plea being that NFRA does not have the jurisdiction to investigate cases prior to its birth — the audits of DHFL were for the financial year prior to 2018. On December 1, the NCLAT ruled that NFRA, in fact, has such a jurisdiction. However, the Telangana High Court, in August, ruled that NFRA does not have such jurisdiction.

The auditor of a company named Brightcom asked a similar question to the Telangana High Court even before NFRA passed orders against him.

The NCLAT order states that after taking into consideration the background for forming NFRA, the judgment of the Apex court, and the proven scams, NFRA has a clear and required retrospective jurisdiction over the alleged offences by delinquent chartered accountants for a period prior to formation of NFRA or prior to coming into effect of relevant portion of Section 132 of Companies Act.

NCLAT relied on the decisions of the Supreme Court in SEBI vs Classic Credit and also in New India Assurance vs Shanti Misra. In these cases, the Apex court had held that change in forum due to change in law cannot be a bar on retrospective implementation. With this decision, the auditors who approached the NCLAT would think twice before they knock on the doors of the Supreme Court to reverse the NCLAT’s decision.

The litigants asked the NCLAT other questions too. Would auditing standards apply to audit of bank branches? NCLAT said they do since they are auditing standards and not mere guidance notes or advisories. Would NFRA have jurisdiction over auditors which the Institute of Chartered Accountants of India (ICAI) also has? NCLAT answered this too in the positive.

Turf wars

In the first few years of NFRA, there appeared to be turf wars between NFRA and the ICAI over who has jurisdiction over auditors. It was generally felt that ICAI has jurisdiction over individual auditors but not on audit firms.

The NFRA’s authority appears to be all-encompassing. NFRA would continue to focus on auditors of listed companies and instances where other regulators such as the Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs (MCA) have raised concerns over the work done by auditors.

ICAI would also have jurisdiction over these auditors and those whom NFRA chooses not to monitor. ICAI has been taking the lead in recommending accounting and auditing standards and training their members on implementing them. The NCLAT judgment clears the air on the jurisdiction and powers of the NFRA. On the ground, audit firms appear to have accepted this fact and audit reports for the past couple of years appear to have been drafted keeping this in mind.

Going forward, audit firms are going to be uber-cautious and will spend a lot of time on documenting their audit work. Audit reports of the future could say a lot of things that haven’t been said so far. Entities should be prepared to pay their auditors more.

The writer is a chartered accountant

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