Supreme Court to Review National Financial Reporting Authority's Powers to Investigate Chartered Accountants' Misconduct

The Supreme Court has agreed to review a plea from the National Financial Reporting Authority (NFRA) concerning its authority to issue show cause notices, conduct investigations, and penalise chartered accountants and accounting firms for misconduct. This move follows NFRA's challenge against certain directives issued by the Delhi High Court in a judgement dated February 7.

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The Delhi High Court had validated Section 132 of the Companies Act, 2013, which empowers NFRA to initiate disciplinary actions against individual partners, chartered accountants, and auditing firms. However, the court annulled show-cause notices sent to several auditing firms, including Deloitte Haskins and Sells LLP and the Federation of Chartered Accountants Association. The court found that NFRA's procedure lacked neutrality and impartiality.

Supreme Court's Initial Observations

The Supreme Court bench, led by Chief Justice Sanjiv Khanna and Justice Sanjay Kumar, issued notices to the auditing firms and others involved in NFRA's plea against the high court's decision. Solicitor General Tushar Mehta represented NEFRA in this matter. Despite this, the top court did not initially agree with allowing three NFRA officials to continue with the probe following the issuance of show cause notices.

Chief Justice Khanna remarked that a detailed judgement like this cannot be stayed easily. He noted that under customs and excise law, officials issuing show cause notices do not later assess cases; this task is assigned to someone else. The bench emphasised the need for separate investigative and adjudicatory roles within NEFRA to ensure fairness.

Impact on NEFRA's Functioning

NEFRA comprises only three members, raising concerns about its functioning being affected by the high court's judgement. The law officers argued that this limited membership could hinder NEFRA's operations. The Supreme Court has issued a notice returnable by April 28, requiring replies within three weeks followed by rejoinders.

The high court had dismissed challenges against NFRA's power to investigate and penalise chartered accountants' misconduct. It rejected petitions from individual accountants and auditing firms like Deloitte Haskins and Sells LLP, stating there was no merit in their arguments.

High Court's Rationale

The high court upheld Section 132 of the Companies Act and NFRA Rules, finding no merit in challenges based on vicarious liability or retroactive operation claims. It also dismissed arguments regarding violations of Article 20(1) of the Constitution. The court asserted that disciplinary proceedings must adhere to fairness and natural justice principles.

While allowing NFRA to initiate fresh proceedings against petitioners, the high court mandated that decisions on disciplinary actions be made independently by NFRA members not involved in audit reviews or audit quality report preparations.

This ongoing legal battle highlights the complexities surrounding regulatory authority powers and procedural fairness in disciplinary actions within India's financial reporting landscape.