The Delhi High Court has affirmed the statutory authority of the National Financial Reporting Authority (NFRA) to investigate and sanction chartered accountants for professional misconduct, rejecting legal challenges to its regulatory mandate.
A division bench comprising Justices Yashwant Varma and Dharmesh Sharma dismissed petitions filed by individual chartered accountants and prominent auditing firms, including Deloitte Haskins and Sells LLP and the Federation of Chartered Accountants Association. The court determined that the arguments contesting NFRA’s jurisdiction lacked substantive legal merit.
Despite upholding NFRA’s overarching authority, the bench set aside the show-cause notices and subsequent penal orders issued against the petitioners, citing procedural deficiencies that failed to meet the standards of neutrality and objective evaluation. The petitioners had contended that the NFRA’s framework imposed undue vicarious liability on auditing firms and their partners, adopted an unduly summary disciplinary process, and was being applied with retrospective effect.
“We uphold the validity of Section 132 of the Companies Act and the NFRA Rules. The challenge premised on vicarious liability, retroactive enforcement, and an alleged violation of Article 20(1) of the Constitution is untenable. Additionally, we reject assertions that these provisions suffer from manifest arbitrariness or a deprivation of due process,” the bench declared in its ruling dated February 7.
While acknowledging the legitimacy of a streamlined disciplinary mechanism, the court emphasized that such proceedings must nonetheless align with foundational principles of procedural fairness and natural justice. Consequently, the ruling permits NFRA to initiate fresh proceedings against the petitioners, stipulating that any disciplinary action must be adjudicated by NFRA members who have remained uninvolved in prior audit reviews or the preparation of Audit Quality Review Reports.
This decision delineates the fine balance between regulatory oversight and procedural fairness, reinforcing the NFRA’s mandate while simultaneously cautioning against procedural lapses that could undermine its disciplinary credibility.
Read More: Supreme Court, Delhi High Court, States High Court, International
