NFRA gets Retrospective Jurisdiction approval from Supreme Court

The National Financial Reporting Authority (NFRA) is now seeing closure in its investigation into statutory audits completed before to the watchdog’s inception in 2018, according to court records received.

The Supreme Court recently maintained the audit watchdog’s retrospective auditing powers, dismissing two appeals of a tribunal order. This decision has enhanced the NFRA’s jurisdiction, validating its authority even before it was formed in October 2018, according to a source acquainted with the regulator’s position.

This development is based on the legal principle known as the ‘doctrine of merger,’ which states that only one operative order can control a certain subject matter at any time. According to a second unnamed source, the Supreme Court’s decision not to interfere in the tribunal judgment has substantial ramifications, effectively deciding the fate of additional challenges to NFRA orders pending resolution in various high courts.

The National Company Law Appellate Tribunal’s December 1, 2023 decision reiterated that the NFRA had “clear and required retrospective jurisdiction over alleged offences by delinquent Chartered Accountants for the period prior to the formation of NFRA.”

The controversy regarding the NFRA’s prior authority began when four branch auditors from the former Dewan Housing Finance Corporation Ltd. challenged disciplinary orders issued by the NFRA for alleged violations. This led to the tribunal’s judgment to uphold the regulator’s retrospective powers.

Two of the branch auditors then filed an appeal against the tribunal order, which was dismissed by the Supreme Court this year.

This clarification on the NFRA’s retrospective jurisdiction strengthens its capacity to review statutory audits completed prior to October 2018. Furthermore, it assures that the country’s corporate and financial sectors are not lacking in regulatory control.

“The decision of the higher forum becomes an effective and enforceable one in the eyes of the law,” stated an informed individual, explaining the significance of the ‘doctrine of merger’ in this context.

In response to the Supreme Court judgment, one of the branch auditors challenged the NFRA’s disciplinary order, arguing that while the proceedings against the auditors have concluded, the law on NFRA has not been clearly settled.

The auditor noted that the NCLAT’s powers are focused on establishing whether the legislation was correctly applied, rather than analyzing the statute’s soundness or constitutionality. As a result, writs filed in the High Court challenging the correctness of the law are unaffected by the Supreme Court’s decision not to interfere in the specific NCLAT order.

As of publishing, the NFRA had not responded to a request for comments on this topic.

This latest legal breakthrough is a key milestone for the NFRA and its regulatory jurisdiction, bringing clarity and confirmation to its retrospective powers and, eventually, reinforcing its authority over the country’s financial reporting standards and norms.

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