NFRA Moves Supreme Court Against Delhi HC Decision To Quash Notices against Audit Firms

Debayan Roy (Bar and Bench) 17 February 2025

Investor Interest

The National Financial Regulating Authority (NFRA) has approached the Supreme Court challenging the Delhi High Court's recent decision to quash show-cause notices issued by the auditing standards watchdog against leading audit firms, including Deloitte Haskins & Sells LLP, SRBC & Co LLP and prominent Chartered Accountants (CA).

The Supreme Court Bench of Chief Justice of India (CJI) Sanjiv Khanna and Justice Sanjay Kumar briefly heard the matter on Monday, when it admitted the appeal and issued notice, returnable by April 28.

In the February 7 ruling under challenge, the High Court had affirmed the NFRA's powers to proceed against auditors or audit firms for professional misconduct but criticised it for certain procedural violations detected in initiating disciplinary proceedings in certain cases.

In particular, the High Court had made it clear that the NFRA is expected to function in divisions, and that the division which conducts audit quality reviews cannot be the same division that initiates disciplinary proceedings against any auditor.

The High Court had, therefore, quashed several show cause notices (SCNs) and ensuing disciplinary proceedings initiated by the NFRA for violating this procedural standard.

The NFRA has now challenged the High Court's judgment in so far as it quashed SCNs issued by the NFRA.

Representing the NFRA, Solicitor General of India Tushar Mehta defended its conduct, adding that it was a composite body and cannot always be expected to function in divisions, particularly when it only has three full time members.

"This has wide ramifications ... Based on audit quality review report (AQRR) show cause notices are issued. Where there are no AQRRs also, those show cause notices (have also been) set aside (by Delhi High Court) ... We are a composite body and we cannot work in divisions ... See, these are the only three members," SG Mehta said.

The Court on Monday declined to stay the High Court judgment. However, it clarified that the NFRA can continue disciplinary proceedings not only in cases where AQRRs have been prepared but also in cases where an AQRR is yet to be prepared - albeit in terms of the High Court's directions on ensuring that the work is done by separate divisions.

"This is a detailed judgment which we cannot stay like this ... Under customs and excise (laws also), the same position emerges ... Show cause notice is by a different authority and assessment is by another different authority ... You can continue the proceedings as per the judgment. It allows it to be done by third-party also," CJI Khanna observed.

The Court proceeded to add that any final orders passed by the NFRA should not be given effect to for now.

"It is open to the petitioner (NFRA) to proceed in terms of the (High Court) judgment ... We are aware of the seriousness. In those cases where AQRR has not been issued, (NFRA) can proceed in terms of the judgment. If it's quashed, then issue fresh notice ... Where final orders passed, it will not be given effect to," the Court said.

Courtesy: Bar & Bench

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