NFRA Judgement preventing DHFL from acting as a Branch Auditor

By Consultants Review Team Monday, 04 December 2023

The National Company Law Appellate Tribunal affirmed the National Financial Reporting Authority's rulings against the auditors of the defunct Dewan Housing Finance Corporation Ltd. The lawsuit is related to an order issued by the NFRA in April, in which it debarred and imposed monetary penalties on four partners of the company K Varghese & Con who were acting as engagement partners for audit failures in 17 branch audits of DHFL. Four appeals had been lodged against the NFRA orders. The NCLAT recently dismissed the appeals, ruling that "NFRA has superior and overriding powers in matters relating to professional misconduct of Chartered Accountants under Section 132 of the Companies Act, 2013..."

The ruling is expected to provide additional support to the NFRA, which was established in 2018 as a statutory body to monitor and enforce compliance with auditing and accounting standards, as well as to oversee the quality of service provided by the professions associated with ensuring compliance with such standards. The NCLAT also held that NFRA has "retrospective" jurisdiction in initiating proceedings against auditors or audit firms in respect of audits conducted before NFRA coming into force and that NFRA can initiate an investigation for matters of misconduct committed prior to the coming into force of Section 132 (4).

"...having considered the background for forming NFRA, the Apex Court's judgment, proven scams, the need to restore shaken public and investor confidence, and the need to prevent any adverse impact on the Indian economy, we hold that NFRA has clear and required retrospective jurisdiction over the alleged offenses by delinquent Chartered Accountants for the period before formation of NFRA or before coming into effect relevant portion of Section 132 of Companies A."

Underscoring the importance of auditors understanding their responsibilities not only to the company but also to the public, the NCLAT stated that giving effect to the NFRA orders that highlight professional misconduct and other misconduct on the part of the appellant concerning a publicly traded company has become critical to make the public aware and enable them to make informed and sound financial decisions and investments.

"NFRA, as an independent audit regulator, has been entrusted by the Parliament after much debate to protect the public interest, including the interests of creditors, by exercising effective oversight over accounting and auditing functions," said the NCLAT ruling by Rakesh Kumar Jain, Member (Judicial), and Naresh Salecha, Member (Technical).

In September 2021, the former DHFL amalgamated with Piramal Capital and Housing Finance Ltd. Based on media reports of an alleged siphoning of public money of approximately Rs 31,000 crore and the Enforcement Directorate's reported action in April 2020 on an alleged banking fraud of approximately Rs 3,700 crore by the promoter and directors of DHFL, the NFRA took suo motu notice of the matter and conducted an Audit Quality Review (AQR). Since then, the NFRA has issued several orders against DHFL's auditors.


Current Issue