SC Upholds NFRA’s Authority to Take Action Against Auditors

The Supreme Court upheld the ruling by the National Company Law Appellate Tribunal (NCLAT) pertaining to disciplinary action against errant auditors, providing a boost to the National Financial Reporting Authority (NFRA), the regulator for auditors and audit firms dealing with major and publicly traded corporations.

Last month, the Supreme Court dismissed an appeal brought by chartered accountant Sam Varghese, a partner of K Varghese & Co.

Varghese was one of four auditors against whom the NFRA intervened, imposing a Rs.1 lakh penalty and barring the CA from practising for a year due to errors in the DHFL branch audit. In what was possibly the first set of cases involving auditors, NCLAT denied the appeal, which Varghese challenged in the Supreme Court.

“We find no reason to interfere with the order of the National Company Law Appellate Tribunal dated December 1, 2023,” a SC bench of CJI D Y Chandrachud, justices J B Pardiwala, and Manoj Misra ruled.

The ruling is considered as critical because several of NFRA’s disciplinary procedures have been contested by other auditors in the High Courts hearing the cases. With the Supreme Court order, the NFRA will be able to make a stronger case.

Over the last several years, the NFRA has increased disciplinary action against auditors and firms, particularly in pending instances such as DHFL, IL&FS, and Cafe Coffee Day, where fraud is believed to have caused the entities’ failure.

In its ruling, the NCLAT stated that disciplinary jurisdiction over CAs remained with the Institute of Chartered Accountants of India and NFRA on a concurrent basis, noting that the latter had “superior and overriding powers” on professional misconduct.

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