NCLAT Delhi: National Financial Reporting Authority Has Overriding Powers To Penalise CAs For Professional Misconduct

The National Company Law Appellate Tribunal (“NCLAT”), Delhi Bench comprising of Justice Rakesh Kumar Jain (Judicial Member) and Mr Naresh Salecha (Technical Member) has dismissed an appeal and upheld the penalty imposed by the National Financial Reporting Authority (“NFRA/Respondent”) on the auditors of Dewan Housing Finance Corporation Ltd (“DHFL”). The ruling confirms that NFRA has the right to issue a penalty retrospectively when there is misconduct. NCLAT further clarified that NFRA holds superior and overriding powers over the Institute of Chartered Accountants of India (“ICAI”) in cases related to the professional misconduct of Chartered Accountants. “NFRA has superior and overriding powers in matters relating to professional misconduct of the Chartered Accountants in terms of Section 132 of Companies Act, 2013 … We may conclude NFRA has been consciously and deliberately given superior authority over ICAI on oversight of auditors and in disciplinary matters as stipulated in Section 132 of Companies Act, 2013 After taking into consideration the background for forming NFRA, the judgment 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 relevant portion of Section 132 of Companies Act, 2013,” The Bench was hearing an appeal filed by Mr Harish Kumar T.K Partner, K. Varghese (“Appellant”) against an order of the NFRA where NFRA had found four chartered accountants - Harish T K, Ayna Tamtam, M Baskaran, and Sam Varghese - working with K. Varghese & Co, guilty of multiple violations. These accountants were assigned to conduct an audit of 17 branches of DHFL. As a result, the four accountants were barred from the practice for a year and a fine of Rs 1 lakh was imposed by the NFRA. The order was challenged by the accountants. The Appellant contended that their role was limited to the audit of a few branches and hence, they cannot be saddled with a larger liability. They further argued that that peer-review certification from ICAI for the financial year in question, 2017-18, established that their job was satisfactory and that they conducted the audit work by Standards of Auditing (“Sas”). However, the Bench rejected their contention stating that SAs are part of the law of the land and are required to be mandatorily complied with from the date of their respective applicability while conducting statutory audits and therefore, the NFRA shall have the authority to retrospectively initiate its investigation. “To sum up the role of branch auditor, though limited primarily to the branch, however, is critical 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 DHFL, including banking fraud of about ₹3,700 crore by directors of DHFL, happened and the auditors clearly failed in their duties” The Bench has clarified that if the NFRA starts investigating any case, no other institution has the power to initiate or continue any parallel proceeding. The NFRA was established after the Satyam scandal of 2009 to act as an independent regulatory body for improving transparency and reliability of financial statements and information of companies in India, following a statutory audit by Chartered Accountants. “This reduces the power of ICAI to act against the professional wrongdoing of its members as stipulated in Section 132 of the Companies Act...we may conclude the NFRA has been consciously and deliberately given superior authority over ICAI on oversight of auditors and in disciplinary matters” According to Section 132 of the 2013 Act, the NFRA is responsible for matters related to accounting and auditing standards. The tribunal has stated that the NFRA has the power to investigate cases of misconduct that occurred even before October 24, 2018, when the authority's rules and powers were notified. The NCLAT also noted that if a new law is created to address past wrongs for the benefit of society, the provision of retrospective application may not be required, and necessary implications can be inferred from the language used. NCLAT concluded by adding that it is of utmost importance that Auditors realise their responsibilities which is necessary not only to the company but also to the public. Any deviation from this will only result in catastrophic effects on the economy of the nation and cause immense prejudice and harm to the public, shareholders, and various stakeholders such as banks, lenders, and creditors. Case Title: Mr Harish Kumar T.K vs National Financial Reporting Authority Case No.: COMPANY ...

NCLAT Delhi: National Financial Reporting Authority Has Overriding Powers To Penalise CAs For Professional Misconduct

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