SC seeks response from MCA on NFRA appeal over quashed show-cause notices to auditors
Feb 17, 2025
Synopsis
The Supreme Court sought responses regarding an appeal by the NFRA against a Delhi High Court decision that quashed show-cause notices to auditors like Deloitte for procedural violations. The Court allowed NFRA to continue disciplinary proceedings under certain conditions, pending further hearings. The case involves significant legal implications and concerns over potential misconduct by auditors.
The Supreme Court on Monday sought response from the Ministry of Corporate Affairs and others on an appeal by the National Financial Reporting Authority (NFRA) seeking stay on a Delhi High Court's decision that quashed its show-cause notices to auditors and chartered accountancy firms, including Deloitte Haskins & Sellers LLP, for certain procedural violations in initiating disciplinary proceedings.
While refusing to stay the HC’s February 7 judgement, a bench led by Chief Justice Sanjiv Khanna issued notice to the government and M/s Snehal Mazoomdar & Co, who was the ‘statutory auditor for the branches’ of Dewan Housing Finance Corporation for 2017-18.
"This is a detailed judgment which we cannot stay like this ... Under customs and excise (laws also), the same position emerges ... Show cause notice is by a different authority and assessment is by another authority. We are aware of the seriousness...," the CJI observed.
The apex court, however, clarified that it is open to the NFRA to proceed in terms of the HC judgment. The Authority can continue disciplinary proceedings not only in cases where audit quality review report (AQRRs) have been prepared but also in cases where an AQRR is yet to be prepared, but no final orders should be passed, the CJI ordered, while posting the matter for further hearing on April 28.
Solicitor General Tushar Mehta, appearing for NFRA, told the SC that the HC order has “wide ramifications”. He said that show cause notices are issued based on AQRR, but the HC had also set aside the show cause notices where there are no AQRRs. “We are a composite body and we cannot work in divisions,” he contended.
“If the ratio of the impugned judgment qua divisions is sought to be extended to non-AQRR cases as well where show cause notice has been issued to initiate disciplinary proceedings, it would have a cascading effect on many cases initiated as well as completed by the NFRA under section 132(4)(a) of the Companies Act, which would have a huge deleterious impact on the larger public interest,” NFRA said in its appeal.
According to NFRA, some portions of the judgment, if not intervened by the SC, will have a “deleterious impact of virtually halting ongoing disciplinary proceedings being conducted in large number of sensitive cases of frauds committed by listed companies involving thousands of crores of public money with the active involvement, or with the aid of commissions and omissions by statutory auditors.”
On February 7, the HC had upheld the validity of Section 132(4) of the Companies Act, 2013, which gives the NFRA power to investigate on its any misconduct by chartered accountants or chartered accountancy firms or on a reference by the Centre. However, quashing the show-cause notices by the authority, the HC 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 NFRA Rules, 2018 clearly contemplate a separation of functions between different constituents of the authority. “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 drawl of the AQRRs," the HC said.
The HC’s ruling had come in response to 11 petitions filed by audit firms and chartered accountants, including Deloitte Haskins & Sells LLP, and individual professionals. The auditors and firms had raised concerns regarding the NFRA’s lack of distinct divisions for audit quality reviews and disciplinary proceedings. For instance, the executive body of NFRA recorded findings of violations of the Standards of Auditing in an AQRR, and later, the same body initiated proceedings for disciplinary action.
[The Economic Times]
