The recent Delhi High Court ruling quashing the National Financial Reporting Authority’s show cause notices to multiple auditors and CAs does not impinge on the regulator’s disciplinary powers, explains Ashok Haldia. The order merely cited technical lapses that can be resolved
Challenge to Section 132 of the Companies Act
SECTION 132 OF the Companies Act 2013, envisaged constitution of the National Financial Reporting Authority (NFRA), to provide for matters relating to accounting and auditing standards. It empowers the NFRA,which was established on October 1, 2018, amongst others, to initiate disciplinary proceedings for professional or other misconduct committed by individual partners, chartered accountants and audit firms.
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Arising out of impugned NFRA orders in the matter of audit conducted and concluded prior to setting up of the NFRA, the petitions filed by individual chartered accountants and auditing firms such as Deloitte Haskins and Sells LLP, and others, challenged the constitutional validity of Section 132 and in the alternative of its retrospective operation. The petitioners also raised concerns about vicarious liability on audit firms and their partners, adoption of summary procedure for trial, and, absence of separate Divisions as envisaged under Section 132 and the Rules for review of audits and based on that for adjudication and punishment.
Quashing of show cause notices issued by NFRA
THE DELHI HIGH Court has quashed the show cause notices on technicalities and not on merits. It observed that Section 132 read with the NFRA Rules, contemplated that the discharge of functions enumerated in Rules 7 and 8, in regard to monitoring and enforcing compliance of accounting and auditing standards should be undertaken by independent units or divisions of the NFRA. However, the NFRA, per the ruling, did not have properly constituted divisions. The executive body of the NFRA, in the first instance, recorded findings of violation of the Standards of Auditing in Audit Quality Review Report, and later the same body proceeded to take a decision to commence disciplinary action. Thus the body which penned the aforesaid report and that which issued the show cause notices remained the same.
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