The National Financial Reporting Authority (NFRA) has moved the Supreme Court seeking affirmation that its internal structure complies with the law after a Delhi High Court order last month quashed notices sent to auditors of two IL&FS group entities—Deloitte Haskins & Sells LLP and SRBC & Co. LLP—saying there is no separation between the regulator’s audit quality review and adjudication functions, two persons familiar with the development said.
The apex court will finally settle the dispute over whether NFRA’s structure is as per law and whether there is adequate separation of the functions of audit quality review and disciplinary proceedings, said one of the persons quoted above.
Also Read: NFRA weighs options after Delhi HC junks notices to auditors in IL&FS audit case
Mint reported on 9 February that the regulator was weighing its options after the Delhi High Court on 7 February quashed the notices issued to the audit firms and some individuals on account of the ‘technical issue’ of the division of functions while disposing of several other challenges to NFRA’s authority, in the regulator’s favour. That included NFRA’s retrospective powers to review audits before the regulator’s creation in 2018.
“A special leave petition has been filed before the Supreme Court to clarify NFRA’s interpretation of the division of its functions is correct. The apex court has given time in April for further hearing and is expected to pass an order on this matter,” said the person, who spoke on condition of not being named.
The Supreme Court heard the matter on 17 February and said the matter would be heard next in the last week of April, showed a court document seen by Mint. The apex court also noted that NFRA could continue proceedings in other audit quality review cases, but the final regulatory order will have to wait until the matter is settled.
Prosecutor and judge
The auditors allege that NFRA prepared the audit quality review report, based on which disciplinary action was initiated—that is, NFRA donned the role of the prosecutor and the judge, showed the Delhi High Court order.
Queries emailed to NFRA, Deloitte Haskins & Sells LLP, and SRBC & Co. LLP on Friday seeking comments for the story remained unanswered at the time of publishing.
The audit watchdog’s case rests on an order of the National Company Law Appellate Tribunal (NCLAT), which on 1 December 2023 ruled that NFRA’s ‘divisions’ are as specified in law.
This order came after four branch auditors of Dewan Housing Finance Ltd unsuccessfully challenged NFRA’s penalty orders. The order clarified that the structure of NFRA did not violate principles of natural justice.
“Two persons had appealed against this NCLAT decision in the apex court, which upheld the NCLAT view that the audit watchdog’s structure is correct. But the Delhi High Court took a different view last month, and the Supreme Court is now set to clarify on this on NFRA’s special leave petition,” said the first person quoted above.
NFRA’s disciplinary orders try to ensure that auditors follow the audit standards and the quality and ethics norms of the Institute of Chartered Accountants of India (ICAI).
Given that one audit firm will audit several businesses, enhancing the quality of the audit is expected to benefit the corporate governance in multiple businesses. NFRA oversees auditors of listed companies, large unlisted companies, insurers, banks and power utilities.
IL&FS group entities and their auditors became the first to face NFRA’s audit quality review after the government replaced the board of directors of the non-bank lender in 2018 following payment defaults. So far, the audit watchdog has conducted six audit quality review reports, four financial reporting quality reviews and nine inspection reports. It also issued penalty orders on 99 auditors, debarring some of them for up to 10 years.
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