In a significant development concerning the regulation of audit practices, the Supreme Court of India has permitted the National Financial Reporting Authority (NFRA) to proceed with its inquiries against chartered accountants and audit firms, provided that no final audit quality review reports have been generated and final orders remain pending. This move comes amid an ongoing legal debate surrounding the extent and procedural framework of NFRA’s disciplinary powers.
Judicial Nuance in the Apex Court’s Directive
A bench comprising Chief Justice Sanjiv Khanna and Justice Sanjay Kumar clarified that while NFRA may continue its investigations and related processes, it must refrain from issuing any final orders in such cases. Additionally, the bench directed that any final orders previously issued by NFRA will not be enforced at this stage. These directions were issued during the hearing of an appeal challenging a previous judgment by the Delhi High Court.
Delhi HC’s Concerns on Procedural Separation
The Delhi High Court had earlier expressed reservations about NFRA’s structural and procedural integrity, particularly criticizing the absence of clearly defined divisions separating audit quality reviews from disciplinary proceedings. The High Court, in its verdict delivered by Justices Yashwant Varma and Dharmesh Sharma, called for a reevaluation of 11 cases, raising concerns about the regulatory framework followed by the audit watchdog.
NFRA Challenges High Court Verdict in Supreme Court
Contesting the High Court’s stance, NFRA escalated the matter to the Supreme Court, arguing that the order was inconsistent with previous decisions issued by both the National Company Law Appellate Tribunal (NCLAT) and the Supreme Court itself. NFRA emphasized that its current procedures align with existing legal precedents and regulatory norms.
Citing Landmark Judgments to Justify Regulatory Mandate
To support its position, NFRA referenced a prior Supreme Court judgment in the case of T K Harish, a branch auditor involved in the DHFL audit. This case is closely tied to a larger investigation concerning the alleged misappropriation of ₹31,000 crore in public funds, as well as a related bank fraud amounting to ₹3,700 crore. Both incidents are currently under scrutiny by multiple law enforcement agencies.
A Legal Conundrum Surrounding Auditor Accountability
NFRA’s appeal also highlighted a perceived inconsistency in the legal treatment of similar cases. Specifically, the audit regulator drew attention to the case of Snehal N Muzoomdar, who served as an engagement partner for a branch auditor involved in the same DHFL audit. While the Supreme Court upheld proceedings against one branch auditor, the Delhi High Court invalidated proceedings in Muzoomdar’s case, despite both cases relating to the same entity and similar roles.
Contradictory Outcomes Prompt Concern from Regulator
This apparent contradiction, NFRA argued, has created an anomalous legal situation. The regulator stressed that allowing different outcomes in cases with nearly identical circumstances undermines consistency in regulatory enforcement and weakens the larger objective of accountability in audit practices.
Awaiting Comprehensive Legal Resolution
The Supreme Court’s decision to allow proceedings to continue while pausing the effect of final orders marks a cautious middle ground. It ensures that investigations do not stall, while simultaneously allowing for judicial review of the regulatory structure. The case is expected to serve as a precedent in clarifying NFRA’s jurisdiction and the procedural safeguards that must accompany disciplinary action against audit professionals in India.