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Informist, Friday, Feb. 7, 2025

 

NEW DELHI – The Delhi High Court Friday upheld the validity of Section 132(4) of the Companies Act, 2013, which gives the National Financial Reporting Authority the power to investigate on its own or on a reference from the Centre cases of misconduct by chartered accountants or chartered accountancy firms and penalise them.

 

The court also upheld Rules 3, 8, 10, and 11 of the National Financial Reporting Authority Rules, 2018, which, respectively, state the classes of companies governed by the authority, monitoring and enforcing compliance with auditing standards, power to probe, and disciplinary proceedings regarding accountants.

 

However, it quashed a bunch of show-cause notices, including those issued to Deloitte Haskins & Sellers LLP, as the NFRA had acted contrary to the legislation's command to maintain division of powers. "We are ... of the firm opinion that the executive body could not have discharged the dual role of rendering findings of guilt and violation of the SAs (Standards on Auditing) while authoring the SAQRR/AQRR (Supplementary Audit Quality Review Report/Audit Quality Review Report) and thereafter don the mantle of the division which is contemplated under Rule 11 (disciplinary proceedings)," the court said.

 

The assessment of whether circumstances warrant a disciplinary enquiry has to be done by a unit of the NFRA separate from the one that drew up the review reports, the court said, as the 2013 Act and the 2018 Rules clearly contemplate a separation of functions between different constituents of the authority.

 

The court left it open to the NFRA to draw up proceedings afresh if it so chooses from the stage of issuance of fresh notices based on the findings that have been recorded in the audit quality review report. The findings and conclusions of the report would have to be seen only as "prima facie opinion" and not a definitive conclusion, it said. Those findings and conclusions may be evaluated afresh to form an opinion on whether disciplinary action should be initiated, it added. "The decision of whether disciplinary action is liable to be commenced shall be taken independently by a complement of the NFRA comprising members who were disconnected and disassociated from the process of audit review and the drawal of the AQRRs," it said.

 

The high court was hearing a batch of petitions filed by chartered accountants and audit firms questioning the validity of Section 132(4) of the Companies Act, 2013, and Rules 3, 8, 10, and 11 of the NFRA Rules, 2018. The petitioners questioned the NFRA's notices in terms of which proceedings were sought to be initiated for disciplinary action for "professional or other misconduct".

 

The petitioners had also challenged the retrospective operation of Section 132 of the Companies Act, which was operationalised in 2018. They said the retrospective operation was unconstitutional as it would result in penalties and disciplinary action in terms that were not contemplated by the statute prior to 2018. 

 

Further, the petitioners said the NFRA was meant to discharge its functions through various independent and separate "divisions". However, in the notices, the body that oversaw the audits was the one that came to the conclusion that there was a failure to comply with accounting standards and initiated proceedings for disciplinary action, they said. This meant the body essentially became both prosecutor and judge, they said.  End

 

Reported by Surya Tripathi

Edited by Rajeev Pai

 

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