Supreme Court Allows NFRA to Continue Proceedings Against CAs, but Restricts Final Orders

In a crucial development impacting India's audit and accounting sector, the Supreme Court (SC) has permitted the National Financial Reporting Authority (NFRA) to proceed with disciplinary cases against chartered accountants (CAs) and audit firms even where no Audit Quality Review Reports (AQRRs) have been prepared and final orders are yet to be passed.

However, a bench comprising Chief Justice Sanjiv Khanna and Justice Sanjay Kumar has directed that NFRA must not issue final orders in these cases for now. Additionally, any final orders already passed will not be given effect until further directives from the court.

NFRA vs. Delhi HC: The Legal Battle

The SC ruling comes in response to NFRA's appeal against a Delhi High Court (HC) order by Justices Yashwant Varma and Dharmesh Sharma, which raised concerns over NFRA's lack of structural divisions to separate audit quality reviews from disciplinary actions. The HC had sought a fresh evaluation in 11 cases, questioning NFRA's approach.

NFRA, however, contended in the Supreme Court that the Delhi HC ruling contradicted previous judgments by the National Company Law Appellate Tribunal (NCLAT) and the SC itself.

Key Case: DHFL Auditor Proceedings

NFRA cited the Supreme Court's judgment in the case of T.K. Harish, a branch auditor of Dewan Housing Finance Corporation Ltd. (DHFL), where a massive financial fraud was under investigation. Authorities are probing an alleged siphoning of ₹31,000 crore in public funds and a bank fraud of ₹3,700 crore.

In its appeal involving auditor Snehal N. Muzoomdar, NFRA argued that the Delhi HC order had created an anomaly. While the SC had upheld proceedings against one branch auditor of DHFL, the Delhi HC quashed proceedings against an engagement partner of another branch auditor of the same company.

What's Next?

The Supreme Court's interim relief allows NFRA to continue its investigations while keeping final decisions on hold. The verdict in this case is expected to set a crucial precedent on audit regulation, oversight, and accountability in India's financial system.

As the legal proceedings unfold, all eyes will be on the SC's final ruling, which could reshape NFRA's powers and the compliance framework for chartered accountants and audit firms.