SC lets audit authority to decide on penal powers over audit quality controllers
New Delhi, Mar 11, 2025
Given their role in the statutory audit of companies and thus on the accuracy of financial reporting, the National Financial Reporting Authority wants to have its regulatory oversight over audit quality controllers.
The National Financial Reporting Authority (NFRA) has got a boost to its powers with the Supreme Court allowing the audit regulator to decide on a dispute over its powers to penalize professionals guiding statutory auditors, showed an order from the apex court.
The Supreme Court on 7 March allowed NFRA to pass an order on the matter and disposed of a Delhi High Court order in January that had ruled that NFRA had no powers to penalize these professionals – called ‘engagement quality control reviewers’ (EQCR).
On NFRA’s appeal against the High Court ruling, the apex court said that a professional who was issued show cause notice by NFRA can file their objections to the regulator and if these are filed, NFRA must consider them on both jurisdictional issues and other aspects before passing a well-reasoned order, showed the apex court order seen by Mint.
Audit ‘engagement quality control reviewers' are experienced professionals within an audit firm or from outside, who evaluate an audit report, the significant judgments and the conclusions in it, before it is issued by the auditor. This can also be done by a team under a chartered accountant.
Given their role in the statutory audit of companies and thus on the accuracy of financial reporting, NFRA wants to have its regulatory oversight over them. The Delhi High Court order on 30 January, however, had said an EQCR partner would not fall within the definition of a statutory auditor and that the regulator’s rules deal with powers to penalize auditors and not any other professional.
“The Delhi High Court had stayed NFRA’s proceedings against some engagement quality control review partners. NFRA challenged one of those orders in the Supreme Court. The apex court ruling in March in effect told the professionals to reply to NFRA’s show cause notice on all matters including the regulator’s jurisdiction. This ruling also indicates that the apex court was not in favour of challenging the regulator’s show cause notices in courts, while it is understandable to move court against the final order of the regulator,” said a person informed about the development.
Why is the order important
The Supreme Court order is a significant development on the issue of NFRA’s jurisdiction over engagement quality control review partners, said the person, who spoke on condition of not being named.
An engagement quality control reviewer is appointed in case of select audits, based on the nature, complexity and size of the audit, explained Nemish Kapadia, Partner at audit and tax service firm Sudit K. Parekh & Co LLP.
“The role of an engagement quality control reviewer is essentially that of a gate keeper and a bouncing board to the audit engagement team. Once appointed, the EQCR is required to be involved on all critical and judgmental areas in the given audit. However, these professionals do not sign the audit report. The concerns raised by them need to be respected but the final decision, essentially, is taken by the signing partner,” said Kapadia.
The Supreme Court also told NFRA not to take any coercive action against the professionals till the watchdog comes out with its order on the issue of jurisdiction. If that order goes against the quality reviewers, they can challenge it as per law, showed the order.
Queries emailed to NFRA on Tuesday seeking comments for the story remained unanswered at the time of publishing.
[Mint]
