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NCLAT upholds NFRA penalty on DHFL auditors

The National Company Law Appellate Tribunal reaffirmed the penalty levied by the National Financial Reporting Authority on auditors of Dewan Housing Finance Corporation Ltd (DHFL), ruling that NFRA was well within its rights to issue a penalty in the case of misconduct retrospectively.

In October, NFRA had imposed a fine of Rs 1 lakh each on 18 DHFL auditors, barring 14 for six months to a year, citing misconduct in branch audits.

Auditors have been blamed for failing in their duties to detect fraud at DHFL. The company was facing fraud allegations of Rs 31,000 crore, with its directors accused of banking fraud of nearly Rs 4,000 crore.

Four DHFL auditors, who had incurred a penalty of Rs 1 lakh each and debarment of one year, had challenged the NFRA order, denying any wrong-doing and questioning that the audit pertained to the five years until 2018-19, which preceded the establishment of NFRA.

The appellate tribunal dismissing their appeals and finding them in violation of standards also decided on the issue of the role of NFRA versus The Institute of Chartered Accountants of India, retrospective application of NFRA rules, and the role of Statutory auditors versus branch auditors, which would have implications for future cases.

The appellate tribunal concluded that the NFRA had superior authority over ICAI on oversight of auditors and in disciplinary matters as stipulated in Section 132 of the Companies Act, 2013.“It is required to be clearly understood that in term of Companies Act, 2013 and NFRA Rules, 2018 over important and serious matters especially involving large alleged accounting or financial frauds, or matters of public interest, etc., NFRA suo-moto can initiate investigation or take for investigating and ICAI will cease to exercise such disciplinary jurisdiction,” it stated.The NCLAT further ruled that NFRA had “clear and required retrospective jurisdiction over the alleged offences by delinquent Chartered Accountants” even for periods preceding its formation under Section 132 of the Companies Act, 2013.

On the issue of statutory audits and branch audits, the bench ruled that the process of appointing both was the same and that the Standards of Auditing applied the same to both statutory and branch auditors.

“It is further noted that the Accounting Standards and Auditing Standards have been defined in the Companies Act, 2013 and both sets of standards are to be mandatorily followed by all stakeholders including the companies and the Chartered Accountants,” NCLAT judgment pointed.

The judgement also pointed that the NFRA had a far wider ambit to conduct investigations into professional misconduct than the ICAI and there was no bar on either to restrict investigation of professional misconduct covered only under Section 22 of the Chartered Accountants Act, 1949, which defines such activities.

“NFRA, as an independent audit regulator has been entrusted by the Parliament after great debate for protecting public interest including of the creditors by exercising effective oversight over accounting and auditing functions,” the bench stated, stating that auditors failing in their responsibility could have catastrophic consequences for the economy.

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