NFRA to clarify on past audit jurisdiction soon
New Delhi, July 13, 2023
The National Financial Reporting Authority (NFRA) will clarify its authority to review audits conducted before October 2018, addressing stakeholders' concerns.
The National Financial Reporting Authority (NFRA) will soon offer clarity on its authority to review the statutory audits of companies conducted before its establishment on 1 October 2018.
The clarification will address concerns of stakeholders following a Supreme Court ruling on Monday dismissing a petition which raised questions on the watchdog’s retrospective jurisdiction, a person aware of the development said.
The watchdog will dispel doubts about its jurisdiction for past periods, and clarify the extent of regulatory oversight of statutory auditors in the country.
Last month, the Bombay High Court instructed NFRA to hear the case of Chaturvedi & Shah LLP, the statutory auditor for Dewan Housing Finance Corp. Ltd, for 2017-18. The firm had challenged NFRA’s jurisdiction for periods predating its creation, following an audit quality review of the financial institution conducted by the audit regulator.
Following the Bombay HC’s directive, NFRA is preparing to determine its jurisdiction. On Monday, the apex court dismissed a special leave petition filed by the audit firm, challenging Bombay high court’s order, the publicly available court document showed.
Early this year, NFRA had issued separate orders for individual auditors and firms responsible for branch audits of DHFL across states in FY18, alleging deficiencies.
It is important to note that branch auditors are different from statutory auditors under Indian laws, and if a branch auditor identifies an issue, it is the statutory auditor’s responsibility to determine how to address it, explained an accounting and auditing expert, seeking anonymity.
Two people in the know of the NFRA’s actions including penalties against branch auditors, said this issue is pending before the National Company Law Appellate Tribunal (NCLAT). Both spoke on the condition of anonymity.
Branch auditors never challenged the jurisdiction of NFRA, but were defending themselves on merits of each case, implying that their confidence on the strength of the underlying facts and figures, and legal argument were in their favour , the people said. The branch auditors “have not challenged the jurisdictional validity; their case is on merits," said one of the two people.
NFRA’s investigation into alleged branch audit deficiencies pertains to the period preceding the acquisition of the non-bank lender by the Piramal Group through a debt resolution plan. In January 2021, the resolution plan put forth by the Piramal Group received support from 94% of DHFL’s creditors, and the transaction subsequently got clearance from various regulatory bodies and the National Company Law Tribunal.
A third person familiar with the developments said no court has dismissed the petitions challenging NFRA’s jurisdiction over audits completed prior to 2018.
“The Bombay High Court has directed the NFRA to decide its jurisdiction before deciding any other matter against auditors. NFRA’s decision on its jurisdiction is subject to judicial review by courts. Neither the Bombay High Court nor Supreme Court, have held that NFRA has jurisdiction over audits completed prior to 2018," said the person, also seeking anonymity.
NFRA has not published orders reporting alleged misconduct or failure in audit by Chaturvedi & Shah LLP, he added.
The NFRA, branch auditors of DHFL and DHFL’s statutory auditor for FY18, Chaturvedi & Shah LLP, did not offer any comments for the story.
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