Delhi High Court rejects pleas by CAs, audit firms against NFRA's powers

Delhi High Court

The Delhi High Court has rejected a challenge to the provisions on the power of the National Financial Reporting Authority (NFRA) to investigate and penalise the misconduct of chartered accountants.

A bench of Justices Yashwant Varma and Dharmesh Sharma dismissed petitions filed by individual chartered accountants and auditing firms, such as Deloitte Haskins and Sells LLP and Federation of Chartered Accountants Association, saying there was no merit in their challenge.

The bench, however quashed the show-cause notices issued to the petitioners as well as the consequent final orders on the ground that the procedure ”clearly lacked attributes of neutrality and a dispassionate appraisal”.The petitioners had raised several objections to the legal framework, including that the provisions amounted to the creation of a vicarious liability on audit firms and their partners, adoption of a summary procedure for trial and retroactive operation.”We uphold the validity of section 132 (of the Companies Act) and the NFRA Rules.

We find no merit in the challenge based on the arguments of vicarious liability, retroactive operation and a violation of Article 20(1) of the Constitution. We also find ourselves unable to sustain the challenge to those provisions which were asserted to suffer from the vice of manifest arbitrariness and deprivation of a fair procedure,” the bench said in an order passed on February 7.

"The prescription of a summary procedure for the trial of disciplinary matters neither obviates nor relieves the NFRA from adhering to a procedure which is in consonance with the principles of fairness and natural justice,” the court said.It left it open to the NFRA to draw fresh proceedings against the petitioners and said the decision on whether disciplinary action is liable to be commenced shall be taken independently by the NFRA members, who were disconnected and disassociated from the process of audit review and the drawl of the ”Audit Quality Review Reports”.