Delhi HC rejects pleas of CAs and Audit Firms against powers of NFRA [Read Judgement]

The High Court of Delhi (Delhi HC) has rejected a challenge to the provisions governing the National Financial Reporting Authority’s (NFRA) ability to investigate and imposed penalty on chartered accountant for misconduct.

A bench of Justices Yashwant Varma and Dharmesh Sharma dismissed petitions filed by individual chartered accountants and auditing firms, including Deloitte Haskins and Sells LLP and the Federation of Chartered Accountants Association, citing a lack of validity in their argument.

The bench, however, overturned the show-cause notices given to the petitioners, as well as the subsequent final orders, on the grounds that the procedure “clearly lacked attributes of neutrality and a dispassionate appraisal”.

The petitioners had highlighted various concerns about the legal framework, including the introduction of vicarious liability on audit firms and their partners, the use of a summary procedure for trial, and retroactive operation. We support the legality of Section 132 (of the Companies Act) and the NFRA Rules.

“We find no merit in the complaint based on vicarious liability, retroactive operation, and a breach of Article 20(1) of the Constitution. We also find ourselves unable to defend the challenge to those provisions that were claimed to suffer from obvious arbitrariness and deprivation of a fair procedure,” the bench stated in an order issued on February 7.

“The specification of a summary procedure for the trial of disciplinary matters neither removes nor relieves the NFRA from adhering to a procedure which is in line with the principles of fairness and natural justice,” the court ruled.

It allowed the NFRA to initiate new proceedings against the petitioners and stated that the decision on whether disciplinary action should be initiated should be made independently by NFRA members who were disconnected and disassociated from the audit review process and the issuance of the “Audit Quality Review Reports”.