NCLAT Empowers NFRA to Retroactively Penalize Auditors: Landmark Ruling in DHFL Case
In a groundbreaking verdict, the National Company Law Appellate Tribunal (NCLAT) has affirmed the National Financial Reporting Authority's (NFRA) authority to retrospectively oversee and take punitive action against Chartered Accountants for misconduct predating its establishment in October 2018. This ruling grants NFRA, the country's exclusive independent audit regulator, the power to penalize auditors and audit firms for misdeeds that occurred before October 2018.
The NCLAT, in a comprehensive 156-page order by Rakesh Kumar Jain and Naresh Salecha, dismissed all four appeals from different Branch Auditors of Dewan Housing Finance Ltd (DHFL). The ruling emphasizes that NFRA holds superior and overriding powers in matters related to professional misconduct of chartered accountants, particularly concerning listed entities and certain other companies, as per Section 132 of the Companies Act 2013.
The landmark ruling establishes NFRA's retrospective jurisdiction, drawing on Supreme Court judgments in SEBI vs Classic Credit and New India Assurance vs Shanti Misra. The NCLAT justified its decision by considering the need to restore public and investor confidence and prevent adverse impacts on the Indian economy in the wake of proven financial scams.
The case pertains to the financial year 2017-18, with NFRA having imposed penalties of ₹1 lakh and a one-year debarment on each of the four appellants for professional misconduct in the DHFL branch audit work. The appellants, Engagement Partners of K Varghese & Co, a mandated audit firm for various DHFL branches, were collectively penalized for their role in audits covering 17 branches.
Importantly, the NCLAT ruling rejected all defenses raised by the auditors, asserting that Standards of Auditing are mandatory, not advisory, and apply to branch audits as well. It held auditors accountable for their crucial role in the overall audit of the company, stating that the auditors of a branch cannot absolve themselves of responsibilities.
Addressing the allegations of a ₹31,000 crore fraud by DHFL, including a ₹3,700 crore banking fraud by DHFL Directors, the NCLAT stressed that auditors cannot claim ignorance. Upholding the penalty and debarment periods, the tribunal deemed them appropriate given the magnitude of the fraud.
Furthermore, the NCLAT ruled that there was no violation of natural justice principles in NFRA orders due to non-constitution of divisions. It concluded by emphasizing the significance of auditors realizing their responsibilities not only to the company but also to the public. This ruling stands as a precedent, marking the first time the NCLAT has pronounced a verdict on the issue of professional misconduct by auditors, and it reinforces NFRA's authority in the oversight of auditors and disciplinary matters.
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