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National Company Law Appellate Tribunal (NCLAT) upholds NFRA penalty on DHFL auditors; The Institute of Chartered Accountants of India and SEBI have limited jurisdiction

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The recent National Company Law Appellate Tribunal (NCLAT) judgment, dismissing 4 DHFL branch auditors’ appeals, has significant implications for oversight and actions against Chartered Accountants (CAs), emphasizing NFRA’s authority. In a 156-page order, it dismissed appeals, affirming no errors in NFRA’s disciplinary orders against the auditors for their audits during the FY 2017-18.    

Key Points:

Retrospective Oversight by NFRA: NCLAT has upheld NFRA’s authority to retroactively oversee and penalize auditors for misconduct predating its establishment in October 2018. This means auditors can be held accountable for misdeeds even before NFRA’s inception. Litigants have vested rights in action but not in the forum.

Exclusive Jurisdiction of NFRA: Even for auditor misconducts being investigated by the ICAI, if they occurred prior to October 2018, NFRA has exclusive jurisdiction over the matter, drawing rationale on Supreme Court precedents (SEBI vs Classic Credit as also in New India Assurance vs Shanti Misra), emphasizing the need to restore public and investor confidence post-proven scams and prevent adverse impacts on the Indian economy.

NFRA’s Superior Authority: NCLAT asserts that NFRA, despite concurrent disciplinary jurisdiction with the The Institute of Chartered Accountants of India, has superior authority, particularly in matters of professional misconduct under Section 132 of the Companies Act 2013.

Significance in Auditing Standards: NCLAT’s ruling underscores the mandatory nature of Standards of Auditing, applying not just to main audits but also to branch audits. It emphasizes the crucial role of branch auditors in the overall audit of a company.

Penalties Upheld for DHFL Auditors: The judgment upheld the penalties including a โ‚น1 lakh fine and a one-year debarment from audit work.

Responsibility of Auditors: Auditors’ responsibilities include not only to the company but also to the public, particularly in cases like the DHFL fraud involving โ‚น31,000 crore.

SEBI and ICAI have limited jurisdiction: The judgment highlighted NFRA’s broader mandate and flexibility compared to SEBI and ICAI. It noted NFRA’s ability to initiate investigations suo-moto in cases of large alleged frauds or matters of public interest. NCLAT observed that โ€œThe jurisdiction of SEBI over the conduct of auditors and audit firms is related to their involvement in defrauding investors and thus narrower than that of the ICAI. The NFRA has more flexibility when it comes to imposing penalty on auditors and audit firms and it has a broader mandate than SEBIโ€.

The judgement is enclosed. Readers are welcome to send their views to Regstreet Law Advisors at info@regstreetlaw.com.

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