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Informist, Monday, Feb. 17, 2025

 

NEW DELHI – The Supreme Court on Monday issued notices to auditors on a petition filed by the National Financial Reporting Authority against a Delhi High Court's Feb 7 order to quash show-cause notices to even those auditors or chartered accountancy firms for which no audit quality review reports were prepared by the authority against them. On Feb 7, the high court had quashed a bunch of show-cause notices, including those issued to Deloitte Haskins & Sellers LLP, as the authority had acted contrary to the legislation's command to maintain division of powers. 

 

However, the bench led by Chief Justice of India Sanjiv Khanna on Monday refused to stay the Delhi High Court order. The apex court said that it was open to the National Financial Reporting Authority proceeding in terms of the judgment of the high court. In cases where no audit quality review reports were prepared by the National Financial Reporting Authority and no final orders were passed by them, proceedings would continue but no final order would be passed, the court said.

 

On Feb. 7, the high court had upheld the validity of Section 132(4) of the Companies Act, 2013, which gives the National Financial Reporting Authority 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. However, quashing the show-cause notices by the authority, the high court had said, "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 assessment of whether circumstances warrant disciplinary enquiry by a unit of the NFRA is separate from the one that drew up the review reports, the high court had said, as the 2013 Act and the National Financial Reporting Authority Rules, 2018 clearly contemplate a separation of functions between different constituents of the authority.

 

The high court had 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 had said. Those findings and conclusions might be evaluated afresh to form an opinion on whether disciplinary action should be initiated, it had 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 had 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 auditors and firms had 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 had said. This meant the body essentially became both prosecutor and judge, they had said.  End

 

Reported by Surya Tripathi

Edited by Avishek Dutta

 

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