ICAI Vs NFRA: Which Holds Greater Authority Over A CA's Conduct?

A host of concerns surrounding the professional misconduct of chartered accountants and the subsequent power of the National Financial Reporting Authority to penalise them were recently addressed by the National Company Law Appellate Tribunal. The tribunal's findings have now been affirmed by the Supreme Court of India.

Constituted in October 2018, the NFRA's primary role is to recommend accounting and auditing standards for companies. Furthermore, it monitors and enforces compliance with these standards and oversees the quality of service provided by accountants involved in ensuring compliance with such standards.

NFRA oversees compliance with auditing and accounting standards for public interest entities. These include all listed companies, large unlisted companies, insurance companies, banks, and the like.

Taking into consideration the small number of such entities in India, NFRA’s oversight extends to only about 4% of the total companies in India. The Institute of Chartered Accountants of India has jurisdiction to oversee compliance for the remaining firms.

The case in point pertains to a penalty and debarment imposed by NFRA on CAs of Dewan Housing Finance Corp. on various counts of violation of auditing standards, non-disclosure of material statements, and the like. The claims stemmed from fiscal 2018.

The primary issue before the tribunal was that, due to the fact that NFRA was constituted in 2018, it lacked the power to examine the period prior to its own formation. In other words, it lacked retrospective jurisdiction.

Another, and perhaps the more crucial one, was whether ICAI exercises primacy of jurisdiction over the NFRA in cases of professional misconduct by CAs working as auditors.

In addressing these issues, the NCLAT reached some significant conclusions.

• The NFRA has superior and overriding powers in matters relating to the professional misconduct of auditors. The tribunal has categorically stated that in serious matters involving large accounting or financial frauds or matters of public interest, the NFRA can initiate a suo-moto investigation. ICAI will not be able to exercise its disciplinary jurisdiction in such cases.

• NFRA has retrospective jurisdiction. The tribunal has stated in clear terms that the creation of the NFRA has not led to the creation of new misconduct violations nor can it levy penalties greater than the ICAI. Put simply, NFRA is merely a new authority that functions under the extant law governing the professional misconduct of CAs.

• Auditing and accounting standards as issued under ICAI’s authority on the recommendation of NFRA are not advisory in nature. They are mandates.

In 2009, a major corporate governance scam came to the fore, which famously came to be known as the Satyam Scandal. Established in 1987, Satyam Computer Services Ltd. was India’s crown jewel in the information technology sector. 

When the company went public in 1991, investors oversubscribed its shares nearly 17 times. It performed robustly till 2009, when Satyam’s founder, Ramalinga Raju, confessed to inflating the financials of his company.

The accounting fraud, by the admission of its own founder and chairman, involved over Rs 7,000 crore in misstated financials.

The entire fiasco prompted the idea of an independent regulator to oversee compliance with auditing and accounting standards. This led to the formation of the NFRA in 2018, a body tasked with improving the transparency and reliability of financial statements and company information.

After extensive debate, the Parliament entrusted NFRA as an independent audit regulator to protect the public interest, including the interests of creditors, by exercising effective oversight over accounting and auditing functions.

Prior to NFRA’s establishment, ICAI was the nodal agency overseeing compliance by auditors. However, NFRA has been consciously and deliberately given superior authority over ICAI on oversight of auditors in disciplinary matters.