NFRA may approach SC over power to probe pre 2018 cases

The National Financial Reporting Authority (NFRA) will likely approach the Supreme Court, challenging the directive of the Telangana High Court that has held the audit regulator, prima facie, has no power to probe cases of professional misconduct occurred before it came into being in 2018, a person close to the development said.

The high court’s observation in a case pertaining to the auditor of Brightcom Group has important ramifications, as it can potentially put fetters on NFRA to launch investigation or initiate action against auditors involved in big scandals like those at IL&FS and DHFL, experts said.

NFRA has already barred some auditors allegedly involved in the IL&FS crisis from undertaking fresh work, in addition to imposing fines on them, but its orders have been challenged by them at the Delhi High Court. In fact, the aggrieved auditors have challenged the vires of Section 132 (4) of the Companies Act, 2013, and the relevant rules that empower NFRA to investigate professional lapses by auditors.

If NFRA’s applications in related cases in other courts are any indication, the regulator may convey to the apex court that Section 132 of the Companies Act provides it adequate power to launch probe and take action against errant auditors of listed and large unlisted public firms even in pre-2018 audit cases, said the person.

Proviso to Section 132(4)(a) of the Companies Act states: “...provided that no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the National Financial Reporting Authority has initiated an investigation under this section.” NFRA could argue that the word “continue” in the proviso reflects the legislative Intent to extend the jurisdiction of NFRA to even those cases where proceedings were continuing even before the NFRA was made operational.

Moreover, the regulator could argue that the accounting and auditing standards existed well before NFRA became operational and the notification of the regulator does not in any way alter the liability of the statutory auditor to fully comply with the law, said the person. So, NFRA's authority to monitor and enforce compliance with these standards, established by law even earlier, should be fully binding on statutory auditors, he added. Moreover, the mere change of "forum" (regulator) doesn’t amount to any retrospective enforcement of law, as the "substantive" part of the law remains as it is, he added.

Last week, the Telangana High Court asked NFRA not to seek audit reports conducted for Brightcom Group from 2014-15 to 2016-17. It granted a stay in a writ filed by auditor P Murali & Co. The auditor had argued that the audits were completed before NFRA’s formation, so they can be reviewed only by the Institute of Chartered Accountants of India (ICAI) under the Chartered Accountants Act, 1949.