Supreme Court could settle dispute over NFRA’s working
New Delhi, March 4, 2025
The National Financial Reporting Authority (NFRA) has moved the Supreme Court seekingaffirmation that its internal structure complies with the law after a Delhi High Court Janu-ary order quashed notices sent to auditors of two IL&FS group entities, Deloitte Haskins &Sells LLP and SRBC & Co. LLP, saying there is no separation between the regulator’s auditquality review and adjudication functions, said two people in the know, seeking anonymity.
The apex court is expected to finally settle the dispute over whether NFRA’s structure is as per law and whether there is adequate separation of the functions of audit quality reviewand disciplinary proceedings, said one of the people quoted above.
Mint reported on 9 February that the regulator was weighing its options after the DelhiHigh Court on 7 February quashed the notices issued to the audit firms and certain indi-viduals owing to ‘technical issue’ of the division of functions while disposing of severalother challenges to NFRA’s authority, in the regulator’s favour. That included NFRA’s ret-rospective powers to review audits before the regulator’s creation in 2018.
“A special leave petition has been filed before the Supreme Court to clarify NFRA’s inter-pretation of the division of its functions is correct. The apex court has given time in Aprilfor hearing and is expected to pass an order on this matter,” the first person added.
The SC heard the matter on 17 February and said the matter would be heard next in the lastweek of April, showed a court document seen by Mint. The apex court also noted that NFRAcould continue proceedings in other audit quality review cases, but the final regulatoryorder will have to wait until the matter is settled.
Auditors allege that NFRA prepared the audit quality review report, based on which discip-linary action was initiated—that is, NFRA donned the role of prosecutor and judge,according to the Delhi HC order. Emailed queries to NFRA, Deloitte Haskins & Sells LLP,and SRBC & Co. LLP on Friday seeking comments for the story remained unanswered at thetime of publishing.
The audit watchdog’s case rests on a National Company Law Appellate Tribunal order,which on 1 December 2023 ruled that NFRA’s ‘divisions’ are as specified in law.
This order came after four branch auditors of Dewan Housing Finance Ltd unsuccessfullychallenged NFRA’s penalty orders. The order clarified that the structure of the
The audit watchdog’s case rests on an NCLAT order, which in 2023 ruled that NFRA’s‘divisions’ are legally valid
NFRA did not violate principles of natural justice.
“Two persons had appealed against this NCLAT decision in the apex court, which upheldthe NCLAT view that the audit watchdog’s structure is correct. But the Delhi High Courttook a diff fferent view in February, and the Supreme Court is now set to clarify on this onNFRA’s special leave petition,” added the first person quoted above.
NFRA’s disciplinary orders try to ensure that auditors follow the audit standards and thequality and ethics norms of the Institute of Chartered Accountants of India (ICAI).
Considering that one audit firm will audit several businesses, enhancing the quality of theaudit is expected to benefit the corporate governance in multiple businesses.
NFRA oversees auditors of all listed companies, insurers, large unlisted firms, banks andpower utilities. IL&FS group firms and their auditors were the first to undergo audit qualityreview by NFRA after the Centre replaced the non-bank lender’s board in 2018. NFRA hasso far conducted six audit quality reviews, four financial reporting quality reviews, nineinspections, and issued penalty orders against 99 auditors, barring a few for up to 10 years.
[Mint]
