Mr. Harish Kumar T.K vs NFRA
COMPANY APPEAL (AT) NO. 68 of 2023 & I.A. No.2007-2009 of 2023
Facts:
1.Appellants are practicing Chartered Accountants who joined the firm K. Varghese & Co. Chartered Accountants, which was assigned audit work of 17 Branches of DHFL. DHFL appointed the Firm on 27.08.2014 as Auditors to Audit 17 Branches of DHFL for the Financial Year 2014-2015 in consultation with the then joint Statutory Auditors of DHFL i.e., M/s. TR Chadha & Co. along with M/s. Rajinder Neeti & Associates.
2.NFRA initiated an Audit Quality Review to probe into role of Statutory Auditors for FY 2017-18, on suspected frauds by the Promoters & Directors of DHFL and alleged that prima facie the appointment of Branch Auditors were done without following due procedures as prescribed in the Companies Act, 2013, as well as violation of certain SAs and therefore the Appellants were charged for professional misconduct.
3.Various orders was passed by the NFRA against the appellants and appellants are challenging the order passed by NFRA i.e., Respondents.
Issue: Whether the Appeal can be admitted and order passed can be set aside?
Arguments:
Appellants:
1.Appellants submitted that they replied to SCNs denying allegations of professional misconduct and requested NFRA to drop SCNs in terms of Section 132(4) of Companies Act, 2013 and also submitted documents establishing that Appellants conducted Audit as per SAs and highlighted that their limited role confined to Audit of Branch Accounts
2.It was submitted that NFRA does not have any retrospective jurisdiction since NFRA itself was constituted on 01.10.2018 vide Ministry of Corporate Affairs (in short ‘MCA’) Notification dated 01.10.2018 and MCA also notified on 24.10.2018 as effective date for coming into force of Section 132(2), (4), (5), (10), (13), (14) & (15) of Companies Act, 2013. The Appellants submitted that NFRA Rules were notified on 13.11.2018, whereas the Financial Statements in question pertains to FY 2017-18 and Audit Reports for different Branch Audit were given on different dates for different branches which were prior to notification bringing NFRA into effect, therefore, the NFRA did not have any jurisdiction to look into the period prior to its own formation on 01.10.2018.
3.It was submitted that enquiry by NFRA was against the laid down procedures since NFRA did not constitute any division as required in Section 132(1A) of the Companies Act, 2013. It is the case of the Appellant that as per Rule 2(g) of NFRA Rules, 2018, NFRA is obligated to establish divisions for the purpose of organising its functions and duties. It has been emphasised that separate divisions are necessary for fair and independent investigations for alleged professional misconduct and other misconduct as can be inferred from Rule 10 & 11 of NFRA Rules, 2018, which prescribed separate divisions for investigations and for enforcement.
4.It was submitted that the term “professional or other misconduct” is defined in Chartered Accountant Act, 1949 therefore, they were under impression that they are covered under Chartered Accountant, 1949 Act only and did not have any indication that alleged professional misconduct can be instituted under Companies Act, 2013. It is stated that the Appellants have received peer-review certification from ICAI for the FY 2017-18 which establishes that their job was satisfactory and the they conducted the Audit work in accordance with SAs and therefore allegations by NFRA are not sustainable.
5.NFRA incorrectly applied the provisions of Chartered Accountant Act, 1949, which defines professional misconduct in Section 22 r/w first Schedule of the Chartered Accountant Act, 1949, according to which the Appellants were required to check that their appointments were in accordance with Section 225 of the Companies Act, 1956 and there was no reference in Companies Act, 1913, in fact the amendment for the same was brought out only in 2022.
6.It was submitted that it was wrong on the part of NFRA to rely on the provision of Section 139(1) of Companies Act, 2013 for annual ratification of Auditors and since they did not receive any Notice for removal under Section 140 of the Companies Act, 2013 the Appellants presumed that they continued as the Branch Auditors. Appellants emphasised that the Firm had undertaken branch audit of DHFL in previous three years also and therefore had a properly documented audit plans available in the audit files for previous years and therefore, documentation displaying an overall audit strategy and development of an audit plan for FY 2017-18 was felt not necessary
Respondents:
1.It was submitted that after media report emerged in public regarding siphoning of public money of Rs. 31,000 Crores by promoters/ directors of DHFL and action by the Enforcement Directorate’s reported action in April 2020 on an alleged banking fraud of about Rs.3700 crore by the promoter/ directors of DHFL, NFRA suo-motu initiated an Audit Quality Review to probe into the role of the Statutory Auditors of DHFL for the FY 2017-18, the year in which the alleged fraud was primarily stated to have occurred.
2.It was submitted that after examination of the Audit Files and materials available on record, NFRA found prima-facie case of professional misconduct on the part of the EPs, four Appellants herein, who were found prima-facie guilty of professional mis-conduct and accordingly SCNs were issued to them under Rule 11 (1) of the NFRA Rules, 2018. It is the case of the Respondent that keeping in view principles of natural justice and in accordance with Rule 11(5) of NFRA Rules 2018, the EPs were given opportunity for a personal hearing. However, the EPs did not avail of the offer of the personal hearing.
3.The Respondent submitted that as per Section 132(1A) of the Companies Act, 2013, “NFRA shall perform its functions through divisions, as may be prescribed”, and the word “as may be prescribed” means if any prescribed. It is case of the Respondent that, NFRA has been functioning keeping in mind the principles of natural justice. In any case, by way of an amendment dated 13.11.2018 to Clause 2(g) of NFRA Rules, 2018, it has been stipulated that divisions means division including one headed by the chairperson or fulltime member for purpose of carrying out its functions and duties.
4.Respondent submitted that the notification of MCA bringing NFRA into existence, does not in any way alter the liability of the auditor to fully comply with the law. It is submitted that S. 132(4) of the Act is a nonobstante clause, hence, all cases fall within the jurisdiction of the NFRA. Additionally, Rule 10(3) of the NFRA Rules, 2018 clearly states that on the commencement of these rules, the action in respect of cases of professional or other misconduct against auditors of companies referred to in Rule 3 shall be initiated by the NFRA and no other institute or body shall initiate any such proceedings against such auditors.
5.Respondent alleged that the Appellants did not comply with most of the Standards on Auditing (SAs) as applicable and further the Appellant had wrong and flawed understanding of SAS, inter alia, SA 210, SA 230, SA315, SA 320, SA 330, SA 700 and section 143(8) of the Companies Act, 2013. The Respondent castigated the conduct of the Appellants for taking the stand that the appointment of the Branch Auditors was not required to be made under Section 139 of the Companies Act, 1956. As per Respondent, it seems that the Appellants did not even check the requirement of the Companies Act, 1956 since they believed that their appointments were not required to be made under Section 139 of the Companies Act, 1956.
6.The Respondent refuted the contentions made by EPs regarding Peer Review Certification of the audit firm and stated that this plea is irrelevant since the proceedings by NFRA under section 132 (4) and the Peer Review conducted as per ICAI requirements are totally different in all aspects including the statutory mandate, scope and coverage. Further there are inherent Limitations of Peer Review as the review would not necessarily disclose all weaknesses in compliance of technical standards and maintenance of quality of attestation services since it would be based on selective tests.
Decision: NCLAT dismissed the appeals.
Rationale:
1.NCLAT noted that The role of ICAI, and The role of NFRA is all together different, of-course, having overriding powers over ICAI for the companies covered under Section 132 of the Companies Act, 2013.
2.It held that the notification of NFRA does not in any way alter the liability of the statutory auditors to fully comply with the law. NFRA’s authority to monitor and enforce compliance with the accounting and auditing standards is with reference to such standards as were established by law even earlier and are binding on statutory auditors. SAs are part of the law of the land and are required to be mandatorily complied with from the date of their respective applicability, while conducting statutory audits. Hence, no new obligation is created on the Appellants and these standards were to be mandatorily followed even prior to NFRA’s establishment. Section 132(4) merely designates NFRA as the forum for determination of professional misconduct.
3.It held that after going through provision of Chartered Accountant Act, 1949 and Companies Act, 2013 it becomes clear that disciplinary jurisdiction over the Chartered Accountants remain with both the ICAI and NFRA on concurrent basis.
4.It held that by default, ICAI has disciplinary jurisdiction over Chartered Accountant. However, it is required to be clearly understood that in term of Companies Act, 2013 and NFRA Rules, 2018 over important and serious matters especially involving large alleged accounting or financial frauds, or matters of public interest, etc., NFRA suo-moto can initiate investigation or take for investigating and ICAI will cease to exercise such disciplinary jurisdiction.
5.It further held that for matters of misconduct committed prior to coming into force of Section 132 (4), NFRA can initiate an investigation. It also stated that the expression “such matters of misconduct” can be inferred to mean misconduct’ which has been committed prior to 24.10.2018 i.e., the date of coming into force of Section 132 (4) and qua which proceedings already underway by the ICAI and w.e.f. 24.10.2018 the said proceeding would be in the exclusive domain of the NFRA and held that Section 132 (4) of the Companies Act, 2013 can be applied retrospectively.
6.It further held that prior to amendment in Rule 2(g) of NFRA Rules 2018, the “division” was not defined but Ministry of Corporate Affairs vide amendment dated 13.11.2018 on NFRA Rule, 2018 specified as to what constitute “division” under Rule 2(g). We note that the Respondent used the division as stipulated in the Companies Act, 2013 and NFRA Rules, 2018, hence there has been no violation of principles of natural justice.
7.It noted that that Section 143(8) along with Section 149 of Companies Act, 2013, the process of appointment of Statutory Audit and Auditor for the branch audit remains the same. It noted that though the role of branch auditor, though limited primarily to the branch, however, is critical for overall audit of the company and the Auditors of the Branch cannot absolve his responsibilities.
8.It further held that legal position the SAs are mandatory and not as advisory or a guidance note to auditors. It also held that that there is no bar on ICAI or NFRA to restrict investigation of professional misconduct covered only under Section 22 of the Chartered Accountants Act, 1949. The powers are far more and wider and any conduct which makes auditor of unbecoming of such profession will make him liable for suitable investigation and if found guilty may face punishment as per law.
Order Copy:
