1. On the role of NFRA versus ICAI on disciplinary matters of Chartered Accountants
The role of ICAI cannot be underestimated since it still exclusively deals with checks on auditors engaged by private companies.
95.95 percent of total registered companies in India as on March 31, 2022, are private companies and the auditors of such large number of companies are still regulated by ICAI exclusively. However, on a careful reading of the provisions of the Companies Act, 2013 and the ICAI Act, “the 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,” the NCLAT held.
2. NFRA has retrospective powers
One of the arguments by the appellants was that since the alleged misconduct occurred in 2017-18, which was before the NFRA’s constitution was notified in October 2018, the NFRA could not launch an investigation into the same.
The NCLAT rejected the submission and held that with effect from October 24, 2018, all proceedings concerning professional misconduct by auditors (in public companies to which the NFRA jurisdiction is made applicable) would lie in the exclusive domain of the NFRA. The NCLAT reasoned that no new offence or liability has been created and that it is simply a case where the forum has shifted from the ICAI to the NFRA.
“Change in forum due to change in law has no bar on being implemented with retrospective effect. The litigant has vested right in action but does not have any vested right on forum. Retrospective application in such procedural law and change in forum is barred only if express provision is made in new law,” the NCLAT explained.
3. There was no violation of natural justice simply because the NFRA investigation and adjudication was not conducted by a “division”
The NCLAT agreed with the NFRA that there was little that the financial audit watchdog could do when the legislature has not prescribed any division. The NCLAT added that such matters cannot be allowed to be avoided only on pure technicalities.
4. The NCLAT rejected an argument by the appellant-branch auditors that they should have minimum responsibility, which is confined only to the branch that they audited. The NCLAT opined that the branch auditor’s role is also critical to the overall audit of a company.
“Auditors of the Branch cannot absolve his responsibilities. We cannot overlook the fact that the allegations of fraud involving Rs. 31,000 Crores by the DHFL including banking fraud of about 3,700 Crores by Directors of DHFL happened and the Auditors clearly failed in their duties,” the NCLAT held.
5. Standards of Auditing (SA) are mandatory and not advisory or a guidance note to auditors.
6. There is no bar on the ICAI or NFRA to restrict its investigations only to “professional misconduct” as defined under Section 22 of the Chartered Accountants Act, 1949.
“The powers are far more and wider and any conduct which makes auditor of unbecoming of such profession will make him liable for suitable investigation and if found guilty may face punishment as per law,” the NCLAT held.
The tribunal added that the “NFRA has far more powers and authority for professional misconduct of members of ICAI in comparison to powers and authority of ICAI itself.”