JAYESH GANDHI vs UNION OF INDIA & ANR.
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment reserved on: 22 July, 2024
Judgment pronounced on: 07 February, 2025
+ W.P.(C) 1065/2021 & CM APPL. 9896/2021 (Direction)
DELOITTE HASKINS & SELLS LLP ….. Petitioner
Through: Mr. Kapil Sibal, Sr. Adv. with Ms. Prachi Dhanani, Mr. Rohini Jaiswal, Mr. Pratham Vir Agarwal, Mr. Rahul Dwarkadas & Ms. Niyati Kohli, Advs.
versus
UNION OF INDIA & ANR. ….. Respondents
Through: Ms. Shiva Lakshmi, CGSC
Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal, Mr. Pranjal Tripathi, Mr. Suradish Vats, Mr. Kunal Kochhar & Ms. Radhika Puri, Advs. for NFRA.
Mr. Kirtiman Singh, CGSC along with Mr. Waize Ali Noor, Mr. Varun Rajawat, Mr. Ranjeev Khatana and Mr. Varun P. Singh, Advs.
+ W.P.(C) 12096/2019 & CM APPL. 49556/2019 (Stay)
FEDERATION OF CHARTERED ACCOUNTANTS ASSOCIATION ….. Petitioner
Through: Ms. Manasi Bhushan, Ms. Sanjana Patel, Ms. Khyati Chhabra, Mr. Vikrant Sharma and Ms. Sakshi Sharma, Advs.
versus
UNION OF INDIA AND ORS. ….. Respondents
Through: Ms. Shiva Lakshmi, CGSC.
Mr. Kirtiman Singh, CGSC along with Mr. Waize Ali Noor, Mr. Varun Rajawat, Mr. Ranjeev Khatana and Mr. Varun P. Singh, Advs.
Ms. Pooja Mehra Saigal, Adv. for Mr. Jatin Dua and Mr. Kaveri Rawal, Advs. for R-3.
+ W.P.(C) 1522/2020 & CM APPL. Nos.17186/2020, 30096/2023
RUKSHAD DARUVALA ….. Petitioner
Through: Mr. Arun Kathpalia, Sr. Adv. with Ms. Aayushi S. Khazanchi, Mr. Aditya Dhupar, Ms. Bani Brar, Ms. Pooja Deepak and Mr. Vinayak Chawla, Advs.
versus
UNION OF INDIA & ANR. ….. Respondents
Through: Ms. Shiva Lakshmi, CGSC.
Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA.
Mr. Kirtiman Singh, CGSC along with Mr. Waize Ali Noor, Mr. Varun Rajawat, Mr. Ranjeev Khatana and Mr. Varun P. Singh, Advs.
+ W.P.(C) 1524/2020 & CM APPL. Nos. 7533/2020, 10777/2020
17184/2020, 30095/2023
UDAYAN SEN ….. Petitioner
Through: Mr. Arun Kathpalia, Sr. Adv. with Ms. Aayushi S. Khazanchi, Mr. Aditya Dhupar, Ms. Bani Brar, Ms. Pooja Deepak and Mr. Vinayak Chawla, Advs.
versus
UNION OF INDIA & ANR ….. Respondents
Through: Ms. Shiva Lakshmi, CGSC.
Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA.
Mr. Kirtiman Singh, CGSC along with Mr. Waize Ali Noor, Mr. Varun Rajawat, Mr. Ranjeev Khatana and Mr. Varun P. Singh, Advs.
+ W.P.(C) 11737/2021
S R B C AND CO LLP ….. Petitioner
Through: Mr. Jayant K. Mehta, Sr. Adv. with Ms. Nikita Sethi, Ms. Aayushi Kumar, Mr. Prateek Khanna, Mr. Ravneet Kaur Malik and Ms. Rumella Jain, Advs.
versus
UNION OF INDIA AND ANR ….. Respondents
Through: Ms. Shiva Lakshmi, CGSC
Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA.
Mr. Kirtiman Singh, CGSC along with Mr. Waize Ali Noor, Mr. Varun Rajawat, Mr. Ranjeev Khatana and Mr. Varun P. Singh, Advs.
+ W.P.(C) 11738/2021
VINAYAK PUJARE ….. Petitioner
Through: Mr. Jayant K. Mehta, Sr. Adv. with Ms. Nikita Sethi, Ms. Aayushi Kumar, Mr. Prateek Khanna, Mr. Ravneet Kaur Malik and Ms. Rumella Jain, Advs.
versus
UNION OF INDIA & ANR. ….. Respondents
Through: Ms. Shiva Lakshmi, CGSC.
Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA.
Mr. Kirtiman Singh, CGSC along with Mr. Waize Ali Noor, Mr. Varun Rajawat, Mr. Ranjeev Khatana and Mr. Varun P. Singh, Advs.
+ W.P.(C) 11739/2021
RAVI BANSAL ….. Petitioner
Through: Mr. Jayant K. Mehta, Sr. Adv. with Ms. Nikita Sethi, Ms. Aayushi Kumar, Mr. Prateek Khanna, Mr. Ravneet Kaur Malik and Ms. Rumella Jain, Advs.
versus
UNION OF INDIA & ANR. ….. Respondents
Through: Ms. Shiva Lakshmi, CGSC.
Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA.
Mr. Kirtiman Singh, CGSC along with Mr. Waize Ali Noor, Mr. Varun Rajawat, Mr. Ranjeev Khatana and Mr. Varun P. Singh, Advs.
Mr. Vikram Jetly, CGSC along with Mr. Abhigyan Siddhant, GP.
+ W.P.(C) 11987/2022 & CM APPL. 35778/2022 (Interim Direction)
JAYESH GANDHI ….. Petitioner
Through: Mr. Jayant K. Mehta, Sr. Adv. with Ms. Nikita Sethi, Ms. Aayushi Kumar, Mr. Prateek Khanna, Mr. Ravneet Kaur Malik and Ms. Rumella Jain, Advs.
versus
UNION OF INDIA & ANR. ….. Respondents
Through: Mr. Vikram Jetly, CGSC along with, Mr. Abhigyam Siddhant, GP & Mr. Shreya Jetly, Adv. for UOI.
Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA.
+ W.P.(C) 1525/2020 & CM APPL. Nos. 10765/2020, 17182/2020 & 30097/2023
SHRENIK BAID ….. Petitioner
Through: Mr. Arun Kathpalia, Sr. Adv. with Ms. Misha Rohatgi Mohta and Mr. Amulya Upadhyay, Advs.
versus
UNION OF INDIA AND ANR ….. Respondents
Through: Ms. Shiva Lakshmi, CGSC.
Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA.
+ W.P.(C) 1650/2023 & CM APPL. 6296/2023 (Interim Direction)
NATRAJAN RAMKRISHNA ….. Petitioner
Through: Mr. Jayant K. Mehta, Sr. Adv. with Ms. Nikita Sethi, Ms. Aayushi Kumar, Mr. Prateek Khanna, Mr. Ravneet Kaur Malik and Ms. Rumella Jain, Advs.
versus
UNION OF INDIA & ANR. ….. Respondents
Through: Mr. Ravi Prakash, CGSC along with Ms. Astu Khandelwal, Mr. Taha Yasin, Mr. Ali Khan, Mr. Yasharth Shukla, Mr. Tarveen Singh Nanda, GP & Mr. Ayushman Kishore, Advs.
Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA.
+ W.P.(C) 2194/2023 & CM APPL. 8353/2023, 39638/2023 (Interim Direction)
ADARSH RANKA ….. Petitioner
Through: Mr. Jayant K. Mehta, Sr. Adv. with Ms. Nikita Sethi, Ms. Aayushi Kumar, Mr. Prateek Khanna, Mr. Ravneet Kaur Malik and Ms. Rumella Jain, Advs.
versus
UNION OF INDIA & ORS. ….. Respondents
Through: Mr. Ravi Prakash, CGSC with Mr. Tarveen Singh Nanda, Adv. for Resp./ UOI
Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA.
+ W.P.(C) 5842/2023 & CM APPL. 22884/2023 (Stay), 40762/2023 (30 Days Delay in C.A.), CM No.63005/2023
SNEHAL N MUZOOMDAR ….. Petitioner
Through: Mr. Shivam Shukla & Ms. Anjali Upadhyay, Advs.
versus
UNION OF INDIA & ANR. ….. Respondents
Through: Ms. Shiva Lakshmi, CGSC for R-1.
Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA.
Mr. Prashant Rawat, GP and Mr. Kabir Singh, Adv.
CORAM:
HON’BLE MR. JUSTICE YASHWANT VARMA
HON’BLE MR. JUSTICE DHARMESH SHARMA
J U D G M E N T
YASHWANT VARMA, J.
TABLE OF CONTENTS
Preface 8
Disciplinary Procedure as per the CA Act 12
Section 132 : A Legislative History 31
Broad Structure under the CA Act 96
NFRA Rules 109
Additional Disclosures by NFRA 116
Auditing Industry : Executive Deliberations 150
The Vicarious Liability Argument 171
Section 132 and its retroactive operation 232
NFRA Rules : Lack of Procedural Safeguards 322
Divisions : Separation of Functions 384
SCNs: The Scar of Pre-determination 437
Peripheral Issues 456
Statement of Conclusions 457
Disposition 474
PREFACE
1. This batch of writ petitions instituted by individual Chartered Accountants1 as well as auditing firms assail the validity of Section 132(4) of the Companies Act, 20132. A challenge is additionally raised to Rules 3, 8, 10 and 11 of the National Financial Reporting Authority Rules, 20183.
2. For the purposes of the challenge which stands raised to the statutory provisions aforenoted, the petitioners seek a declaration that those provisions be struck down as being unconstitutional on the ground of being arbitrary and ultra vires. In the alternative, the petitioners seek an appropriate declaration to the effect that Section 132(4) of the Companies Act as well as Rules 3, 8 10 and 11 of the NFRA Rules be held not to apply to any audit completed before 01 October 2018. The prayer in the alternative essentially calls upon the Court to read down those provisions as being inapplicable to audits that may have been completed prior to the introduction of Section 132 in the Companies Act and thus avoid a declaration of invalidity being rendered.
3. The petitioners in this batch have individually impugned the notices issued by the National Financial Regulatory Authority4 in terms of which proceedings were sought to be initiated by the respondent for commencement of disciplinary action in respect of perceived acts of professional or other misconduct and for consequential imposition of penalties. In some of the writ petitions, final orders of punishment including that of debarment had also come to be passed and which too have been impugned in the instant writ petitions.
4. The challenge on the basis of constitutional invalidity is founded on a retroactive operation of Section 132 of the Companies Act and which is viewed as empowering the NFRA to initiate disciplinary proceedings not just against individual partners and CAs but also auditing firms in respect of any audit that may have been conducted including those commenced and concluded prior to the introduction of that provision in the Companies Act.
5. Section 132 came to be incorporated in the Companies Act by virtue of Act 18 of 2013 and came to be operationalized in terms of a notification issued on 01 October 2018. In terms of that notification, the Union Government designated the said date as the point of commencement as well as the date of constitution of the NFRA. It is in the aforesaid backdrop that the petitioners contend that Section 132 and its retrospective operation would be rendered unconstitutional and invalid since it contemplates the imposition of penalties as well as disciplinary action in terms which were not contemplated by the statute prior to 01 October 2018. The challenge to Section 132 also proceeds on the ground of an alleged lack of procedural due process as well as the deprivation of rights and safeguards which were conferred upon a CA or a firm while facing disciplinary action under the Chartered Accountants Act, 19495 read along with the Chartered Accountants Regulations, 19886 and the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 20077.
6. The action of the respondents which stands impugned in this batch is also based on the various provisions contained in Section 132 itself as well as the NFRA Rules. This facet of the challenge is based on the petitioners arguing that in terms of the statutory provisions aforenoted, the NFRA is envisaged to discharge its functions and duties through various independent and separate divisions. According to the writ petitioners, the statute itself envisages the functions of monitoring and enforcement of accounting standards, overseeing quality of service, suggesting measures, the power to investigate as well as to undertake disciplinary action is contemplated to be discharged by separate divisions of the NFRA. According to the writ petitioners, in the facts of these cases it is apparent that the body which oversaw the audits in question was the same which came to the conclusion that there was a failure to comply with accounting standards itself and initiated proceedings for taking disciplinary action. They thus contend that the very same body that had drawn a report on the basis of which the disciplinary proceedings are sought to be initiated and undertaken has essentially donned the role of both prosecutor and judge. This, according to the petitioners, is sufficient to hold the initiation of action as being in clear violation of fair and due process and in breach of Article 14 of the Constitution.
7. While we had concluded the hearing on this batch of writ petitions on 22 July 2024, the pronouncement of the present judgment was delayed primarily on account of written submissions being tendered by NFRA only on 06 October 2024. The Court was thereafter constrained to await any response that the petitioners may have wished to submit since those submissions were circulated amongst learned counsels for the petitioners only around that time.
DISCIPLINARY PROCEDURE AS PER THE CA ACT
8. Having noticed the principal grounds of challenge, it becomes appropriate to note that prior to the introduction of Section 132 of the 2013 Act, disciplinary proceedings against a CA was regulated by the provisions contained in the CA Act read along with the 1988 Regulations and the Misconduct Rules 2007. The CA Act incorporated provisions in Chapter V for the purposes of undertaking disciplinary proceedings against a member or a firm. Prior to certain amendments which were introduced in the CA Act in 2006 and 2022, disciplinary proceedings against a member of a firm were to be undertaken by a Disciplinary Directorate which was a body charged with undertaking a preliminary examination of a complaint, a Board of Discipline which was to try cases of professional or other misconduct specified in the First Schedule of the CA Act and the Disciplinary Committee in respect of members found to be guilty of professional or other misconduct mentioned in either the Second Schedule or both the First and the Second Schedules forming part of the CA Act, 1949.
9. By virtue of amendments which came to be ushered by Act 12 of 2022, various amendments came to be introduced in Sections 2 which also and alongside saw the introduction of Sections 21A and 21B in the CA Act. Act 12 of 2022 also introduced provisions pertaining to the registration of firms. As the provisions stood in the CA Act around the time when Section 132 came to be introduced, the Council as contemplated under Section 9 of the CA Act, stood empowered to establish a Disciplinary Directorate headed by an officer designated as the Director Discipline for undertaking investigations in respect of any information or complaint received by the Council. In terms of Section 21, the Director Discipline was firstly charged with analyzing the information or complaint and arrive at a prima facie opinion with respect to the alleged misconduct. Wherever a Director Discipline were to form the opinion that a member was guilty of any professional or other misconduct specified in the First Schedule, it was required to place the matter before the Board of Discipline. If the Director Discipline were to be of the opinion that the misconduct would be classifiable either in the Second Schedule or both the Schedules, it was obliged to place the matter before the Disciplinary Committee.
10. The Board of Discipline by virtue of Section 21A of the CA Act was to comprise of persons with experience in law and having knowledge of disciplinary matters, two members of which one would be a member of the Council elected by the said body itself and the other being a member nominated by the Union Government from amongst persons of eminence having experience in the field of law, economics, business, finance or accountancy. The Director Discipline in terms of Section 21A was to function as the Secretary of the Board of Discipline. By virtue of Section 21A(3), the Board of Discipline upon coming to the conclusion that a member was guilty of professional or other misconduct mentioned in the First Schedule, could impose one or more of the following punishments:-
A. Reprimand the member
B. Remove the name of the member from the Register
C. Impose such fine as it may think fit subject to the prescription of the fine not exceeding INR 1 lakh.
11. The Disciplinary Committee in terms of Section 21B was comprised of the President or the Vice President of the Council to act as the Presiding Officer and two members to be elected from amongst the members of the Council. The Disciplinary Committee was also envisaged to comprise of two members nominated by the Union Government from amongst persons of eminence having experience in the field of law, economics, business, finance or accountancy. It thus became a five-member body which upon coming to the conclusion that a member was guilty of professional or a misconduct mentioned in the Second Schedule or both the Schedules could proceed to take any one or more of the following actions namely:-
A. Reprimand the member
B. Remove the name of the member from the Register permanently or for such period as it may think fit
C. Impose such fine as deemed appropriate and which could extend to INR 5 lakhs.
12. Post promulgation of Act 12 of 2022, the Director Discipline came to be empowered by statute to undertake an investigation either suo moto or on receipt of information or complaint. In the course of undertaking that investigation, where the Director Discipline were to find that the case merited further inquiry, it was obliged to provide an opportunity to the member or the firm as the case may be, to submit a written statement. Upon the Director Discipline finding prima facie that a case for professional or other misconduct mentioned in the First Schedule was made out, it was required to submit a preliminary examination report to the Board of Discipline. Similarly, if it came to the prima facie conclusion that a professional or other misconduct was found to be established and would fall either in the Second Schedule or both the Schedules, it was required to transmit its preliminary examination report to the Disciplinary Committee.
13. Section 21 further contemplated that if a Director Discipline were to come to form the opinion that no prima facie case was made out either against the member or the firm, it was required to transmit the complaint along with all relevant documents to the Board of Discipline and if that body were to concur with the findings of the Director Discipline, it could direct a closure of the proceedings. If it were to disagree and continue action upon the complaint itself, it could refer the matter either to the Disciplinary Committee or even advise the Director Discipline to undertake a further investigation. Sections 21A and 21B thus encapsulated the procedure which was liable to be adhered to by the Board of Discipline and the Disciplinary Committee while exercising their respective powers to undertake disciplinary action against a member of the firm.
14. Professional or other misconduct was defined in Section 22 of the CA Act which in turn bids one to proceed to the First and the Second Schedules which set out the various acts or omissions which would amount to misconduct. For purposes of lucidity, we deem it appropriate to extract Sections 21, 21A and 21B in the form of a comparative table and which captures how those set of provisions read prior to and after their substitution by Act 12 of 2022:-
Section
Pre-Amendment
Post-Amendment
S. 21
21. Disciplinary Directorate
(1) The Council shall, by notification, establish a Disciplinary Directorate headed by an officer of the Institute designated as Director (Discipline) and such other employees for making investigations in respect of any information or complaint received by it.
(2) On receipt of any information or complaint along with the prescribed fee, the Director (Discipline) shall arrive at a prima facie opinion on the occurrence of the alleged misconduct.
(3) Where the Director (Discipline) is of the opinion that a member is guilty of any professional or other misconduct mentioned in the First Schedule*, he shall place the matter before the Board of Discipline and where the Director (Discipline) is of the opinion that a member is guilty of any professional or other misconduct mentioned in the Second Schedule** or in both the Schedules, he shall place the matter before the Disciplinary Committee.
(4) In order to make investigations under the provisions of this Act, the Disciplinary Directorate shall follow such procedure as may be specified.
(5) Where a complainant withdraws the complaint, the Director (Discipline) shall place such withdrawal before the Board of Discipline or, as the case may be, the
Disciplinary Committee, and the said Board or Committee may, if it is of the view that the circumstances so warrant, permit the withdrawal at any stage.]
Disciplinary Directorate.
(1) The Council shall, by notification, establish a Disciplinary Directorate consisting of a Director (Discipline), at least two Joint Directors (Discipline) not below the rank of Deputy Secretary of the Institute and such other employees appointed under Section 16, for making investigations either suo motu, or on receipt of an information or a complaint, in such form, along with such fees as may be specified.
(2) Within thirty days of receipt of an information or a complaint, the Director (Discipline) shall decide in such manner as may be specified, whether a complaint or information is actionable or is liable to be closed as non-actionable:
Provided that the Director (Discipline) may call for additional information from the complainant or the informant, as the case may be, by giving fifteen days time before deciding whether the case is actionable or non-actionable:
Provided further that the recommendations of the Director (Discipline) on nonactionable complaints or information shall be submitted to the Board of Discipline within sixty days of its receipt and the Board of Discipline may, after looking into its merits refer such complaint or information to the Director (Discipline) for conducting further investigation.
(3) While making investigation into a case which is found to be actionable, the Director (Discipline) shall give an opportunity to the member or the firm, as the case may be, to submit a written statement within twenty-one days which may further be extended by another twenty-one days, for reasons to be recorded in writing.
(4) Upon receipt of the written statement under sub-section (3), if any, the Director (Discipline) shall send a copy thereof to the complainant or the informant, as the case may be, and the complainant or the informant shall, within twenty-one days of the receipt of such written statement, submit his rejoinder.
(5) Upon receipt of the written statement under sub-section (3) and rejoinder under sub-section (4), the Director (Discipline) shall submit a preliminary examination report within thirty days, if a prima facie case is made out against a member or a firm, as the case may be.
(6) In case a prima facie case is made out for any professional or other misconduct mentioned in the First Schedule, the Director (Discipline) shall submit the preliminary examination report to the Board of Discipline and where prima facie case is made out for any professional or other misconduct mentioned in the Second Schedule or in both the First Schedule and the Second Schedule, he shall submit a preliminary examination report to the Disciplinary Committee:
Provided that a complaint or information filed by any authorised officer of the Central Government or a State Government or any statutory authority duly supported by an investigation report or relevant extract of the investigation report along with supporting evidence, shall be treated as preliminary examination report:
Provided further that where no prima facie case is made out against the member or the firm, the Director (Discipline) shall submit such information or complaint with relevant documents to the Board of Discipline and the Board of Discipline may, if it agrees with the findings of the Director (Discipline), close the matter or in case of disagreement, itself proceed further or refer the matter to the Disciplinary Committee or advise the Director (Discipline) to further investigate the matter.
(7) For the purpose of investigation under this Act, the Disciplinary Directorate shall follow such procedure as may be specified.
(8) A complaint filed with the Disciplinary Directorate shall not be withdrawn under any circumstances.
(9) The status of actionable information and complaints pending before the Disciplinary Directorate, Boards of Discipline and Disciplinary Committees and the orders passed by the Boards of Discipline under Section 21-A and by the Disciplinary
Committees under Section 21-B shall be made available in the public domain by the Disciplinary Directorate in such manner as may be prescribed.]
S.21A
1) The Council shall constitute a Board of Discipline consisting of?
(a) a person with experience in law and having knowledge of disciplinary matters and the profession, to be its presiding officer;
(b) two members one of whom shall be a member of the Council elected by the Council and the other member shall be nominated by the Central Government from amongst the persons of eminence having experience in the field of law, economics, business, finance or accountancy;
(c) the Director (Discipline) shall function as the Secretary of the Board.
(2) The Board of Discipline shall follow summary disposal procedure in dealing with all cases before it.
(3) Where the Board of Discipline is of the opinion that a member is guilty of a professional or other misconduct mentioned in the First Schedule, it shall afford to the member an opportunity of being heard before making any order against him and may thereafter take any one or more of the following actions, namely 😕
(a) reprimand the member;
(b) remove the name of the member from the Register up to a period of three months;
(c) impose such fine as it may think fit which may extend to rupees one lakh.
(4) The Director (Discipline) shall submit before the Board of Discipline all information and complaints where he is of the opinion that there is no prima facie case and the Board of Discipline may, if it agrees with the opinion of the Director (Discipline), close the matter or in case of disagreement, may advise the Director (Discipline) to further investigate the matter.
Board of Discipline.(1) The Council shall, by notification, constitute one or more Boards of Discipline, each consisting of
(a) a person, not being a member of the Institute, with experience in law and having knowledge of disciplinary matters and the profession, to be nominated by the Central Government as its Presiding Officer, from out of a panel of persons prepared and provided by the Council in such manner as may be prescribed;
(b) one member, who is a person of eminence having experience in the field of law, economics, business, finance or accountancy and not being a member of the Institute, to be nominated by the Central Government from out of a panel of persons prepared and provided by the Council in such manner as may be prescribed;
(c) one member to be nominated by the Council from out of a panel of members of the Institute to be prepared by the Council, in such manner as may be prescribed;
(d) an officer of the Institute not below the rank of a Deputy Secretary shall function as the Secretary of the Board of Discipline:
Provided that the Presiding Officer nominated under clause (a) and the member nominated under clause (b) may be the same for different Boards of Discipline constituted under this sub-section.
(2) The Board of Discipline shall, while considering the cases placed before it, follow such procedure including faceless proceedings and virtual hearings as may be specified.
(3) The Board of Discipline shall, on receipt of preliminary examination report from Director (Discipline), require the member or the firm, as the case may be, against whom such preliminary examination report has been filed, to submit a written statement within twenty-one days which may further be extended by another twenty one days, in exceptional circumstances, for reasons to be recorded in writing.
(4) The Board of Discipline shall conclude its inquiry within ninety days of the receipt of preliminary examination report from the Director (Discipline).
(5) Upon inquiry, if the Board of Discipline finds that such member is guilty of a professional or other misconduct mentioned in the First Schedule, it may pass an order within thirty days of such finding, after providing an opportunity of being heard to the member, taking any one or more of the following actions, namely
(a) reprimand the member and record it in the Register of members;
(b) remove the name of the member or members from the Register of members up to a period of six months;
(c) impose such fine as it may think fit which may extend to two lakh rupees.
(6) Where on the basis of evidence brought on record or during the course of an inquiry pertaining to a member, the Board of Discipline is of the opinion that any such member who is a partner or owner of a firm, has been repeatedly found guilty of misconduct mentioned in the First Schedule during the last five years, the following action may also be taken against such firm, namely
(a) prohibit the firm from undertaking any activity or activities relating to the profession of a chartered accountant in practice for such period not exceeding one year; or
(b) impose such fine as it may think fit, which may extend to twenty-five lakh rupees.
(7) Where a member or a firm fails to pay the fine imposed under sub-section (5) or sub-section (6) within such time as may be specified, the Council shall remove the name of such member or firm from the Register of members or Register of firms, as the case may be, for such period as it may think fit.
(8) The Presiding Officer and members of the Board of Discipline shall be paid such allowances as may be prescribed.]
S. 21B
(1) The Council shall constitute a Disciplinary Committee consisting of the President or the Vice-President of the Council as the Presiding Officer and two members to be elected from amongst the members of the Council and two members to be nominated by the Central Government from amongst the persons of eminence having experience in the field of law, economics, business, finance or accountancy:
Provided that the Council may constitute more Disciplinary Committees as and when it considers necessary.
(2) The Disciplinary Committee, while considering the cases placed before it shall follow such procedure as may be specified.
(3) Where the Disciplinary Committee is of the opinion that a member is guilty of a professional or other misconduct mentioned in the Second Schedule or both the First Schedule and the Second Schedule, it shall afford to the member an opportunity of being heard before making any order against him and may thereafter take any one or more of the following actions, namely 😕
(a) reprimand the member;
(b) remove the name of the member from the Register permanently or for such period, as it thinks fit;
(c) impose such fine as it may think fit, which may extend to rupees five lakhs.
(4) The allowances payable to the members nominated by the Central Government shall be such as may be specified.
(1) The Council shall, by notification, constitute one or more Disciplinary Committees, each consisting of
(a) a person, not being a member of the Institute, with experience in law and having knowledge of disciplinary matters and the profession, to be nominated by the Central Government as its Presiding Officer, from out of a panel of persons prepared and provided by the Council in such manner as may be prescribed;
(b) two members, who are persons of eminence having experience in the field of law, economics, business, finance or accountancy and not being a member of the Institute, to be nominated by the Central Government from out of a panel of persons prepared and provided by the Council in such manner as may be prescribed;
(c) two members to be nominated by the Council from out of a panel of members of the Institute to be prepared by the Council in such manner as may be prescribed:
Provided that the Presiding Officer nominated under clause (a) and the members nominated under clause (b) may be the same for different Disciplinary Committees constituted under this sub-section.
(2) The Disciplinary Committee shall, while considering the cases placed before it, follow such procedure including faceless proceedings and virtual hearings as may be specified.
(3) The Disciplinary Committee shall, on receipt of preliminary examination report from Director (Discipline), require the member or the firm, as the case may be, against whom such preliminary examination report has been filed, to submit a written statement within twenty-one days, which may further be extended by another twenty-one days in exceptional circumstances, for reasons to be recorded in writing.
(4) The Disciplinary Committee shall conclude its inquiry within one hundred and eighty days of receipt of the preliminary examination report from the Director (Discipline).
(5) Upon inquiry, if the Disciplinary Committee finds that a member is guilty of a professional or other misconduct mentioned in the Second Schedule or in both the First Schedule and the Second Schedule, it may pass an order within thirty days of such a finding, after providing an opportunity of being heard to the member, taking any one or more of the following actions, namely
(a) reprimand the member and record it in the Register of members; or
(b) remove the name of the member from the Register of members permanently or for such period, as it may think fit; or
(c) impose such fine as it may think fit, which may extend to ten lakh rupees.
(6) Where on the basis of evidence brought on record or during the course of an inquiry pertaining to a member, the Disciplinary Committee is of the opinion that any such member, who is a partner or owner of a firm has been repeatedly found guilty of misconduct mentioned in the Second Schedule or in both the First Schedule and the Second Schedule, during the last five years, the following actions may also be taken against such firm, namely
(a) prohibit the firm from undertaking any activity or activities relating to the profession of a chartered accountant in practice for such period not exceeding two years; or
(b) suspend or cancel the registration of the firm and remove its name from the Register of firms permanently or for such period as it may think fit; or
(c) impose such fine as it may think fit, which may extend to fifty lakh rupees.
(7) Where a member or a firm fails to pay the fine imposed under sub-section (5) or sub-section (6) within the specified time, the Council shall remove the name of such member or firm from the Register of members or Register of firms, as the case may be, for such period, as it may think fit.
(8) The Presiding Officer and members of the Disciplinary Committee shall be paid such allowances as may be prescribed.]
15. At this juncture we deem it apposite to note that even though the amendments came to be introduced vide Sections 21, 22 and 23 of the Act No. 12 of 2022, however the same have not been notified till date. In this regard, reference may be made to Notification dated 10 May 2022 and which reads as under:-
S.O. 2184(E).In exercise of the powers conferred by sub-section (2) of section 1 of the Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (Amendment) Act, 2022 (12 of 2022), the Central Government hereby appoints the 10th day of May, 2022, as the date on which the following provisions of the said Act shall come into force, namely:-
SI. No.
Provisions
1.
Sections 1 to 15 (both inclusive).
2.
Section 16 [except clause (i)].
3.
Sections 17 to 19 (both inclusive).
4.
Section 24.
5.
Sections 28 to 35 (both inclusive).
6.
Section 36 [except clause (i)].
7.
Section 37 [except clause (i) & (ii)].
8.
Sections 38 to 50 (both inclusive).
9.
Section 51 [except clause (i)].
10.
Sections 52 to 54 (both inclusive).
11.
Sections 59.
12.
Sections 63 to 71 (both inclusive).
13.
Sections 74 to 83 (both inclusive).
14.
Section 84 [except clause (i)].
15.
Sections 85 to 87 (both inclusive).
16.
Sections 92.
17.
Sections 96 to 104 (both inclusive).
[F. No. 12/11/2019-PI]
INDER DEEP SINGH DHARIWAL,
Jt. Secy.
A look at the official website of the Ministry of Corporate Affairs shows that no further notifications have been issued with respect to Act No. 12 of 2022.
16. Of equal significance are the First and Second Schedules of the CA Act which specify with sufficient clarity and precision acts that would amount to professional or other misconduct. Those Schedules are reproduced hereinbelow: –
SCHEDULE I
Part I
Professional misconduct in relation to chartered accountants in practice
A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he
(1) allows any person to practice in his name as a chartered accountant unless such person is also a chartered accountant in practice and is in partnership with or employed by him;
(2) pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his professional business, to any person other than a member of the Institute or a partner or a retired partner or the legal representative of a deceased partner, or a member of any other professional body or with such other persons having such qualifications as may be prescribed, for the purpose of rendering such professional services from time to time in or outside India.
Explanation.In this item, partner includes a person residing outside India with whom a chartered accountant in practice has entered into partnership which is not in contravention of Item (4) of this Part;
(3) accepts or agrees to accept any part of the profits of the professional work of a person who is not a member of the Institute:
Provided that nothing herein contained shall be construed as prohibiting a member from entering into profit sharing or other similar arrangements, including receiving any share, commission or brokerage in the fees, with a member of such professional body or other person having qualifications, as is referred to in Item (2) of this Part;
(4) enters into partnership, in or outside India, with any person other than a chartered accountant in practice or such other person who is a member of any other professional body having such qualifications as may be prescribed, including a resident who but for his residence abroad would be entitled to be registered as a member under clause (v) of sub-section (1) of Section 4 or whose qualifications are recognised by the Central Government or the Council for the purpose of permitting such partnerships;
(5) secures, either through the services of a person who is not an employee of such chartered accountant or who is not his partner or by means which are not open to a chartered accountant, any professional business:
Provided that nothing herein contained shall be construed as prohibiting any arrangement permitted in terms of Items (2), (3) and (4) of this Part;
(6) solicits clients or professional work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means:
Provided that nothing herein contained shall be construed as preventing or prohibiting
(i) any chartered accountant from applying or requesting for or inviting or securing professional work from another chartered accountant in practice; or
(ii) a member from responding to tenders or enquiries issued by various users of professional services or organisations from time to time and securing professional work as a consequence;
(7) advertises his professional attainments or services, or uses any designation or expressions other than chartered accountant on professional documents, visiting cards, letter heads or sign boards, unless it be a degree of a University established by law in India or recognised by the Central Government or a title indicating membership of the Institute of Chartered Accountants of India or of any other institution that has been recognised by the Central Government or may be recognised by the Council:
Provided that a member in practice may advertise through a write up, setting out the services provided by him or his firm and particulars of his firm subject to such guidelines as may be issued by the Council;
(8) accepts a position as auditor previously held by another chartered accountant or a certified auditor who has been issued certificate under the Restricted Certificate Rules, 1932 without first communicating with him in writing;
(9) accepts an appointment an auditor of a company without first ascertaining from it whether the requirements of Section 225 of the Companies Act, 1956 (1 of 1956) [or Sections 139 to 141 of the Companies Act, 2013 (18 of 2013) or any other law pertaining to appointment of auditors for the time being in force] in respect of such appointment have been duly complied with;
(10) charges or offers to charge, accepts or offers to accept in respect of any professional employment, fees which are based on a percentage of profits or which are contingent upon the findings, or results of such employment, except as permitted under any regulation made under this Act;
(11) engages in any business or occupation other than the profession of chartered accountant unless permitted by the Council so to engage:
Provided that nothing contained herein shall disentitle a chartered accountant from being a director of a company (not being a managing director or a wholetime director) unless he or any of his partners is interested in such company as an auditor;
(12) allows a person not being a member of the Institute in practice, or a member not being his partner to sign on his behalf or on behalf of his firm, any balance-sheet, profit and loss account, report or financial statements.
Part II
Professional misconduct in relation to members of the Institute in service
A member of the Institute (other than a member in practice) shall be deemed to be guilty of professional misconduct, if he being an employee of any company, firm or person
(1) pays or allows or agrees to pay directly or indirectly to any person any share in the emoluments of the employment undertaken by him;
(2) accepts or agrees to accept any part of fees, profits or gains from a lawyer, a chartered accountant or broker engaged by such company, firm or person or agent or customer of such company, firm or person by way of commission or gratification.
Part III
Professional misconduct in relation to members of the Institute generally
A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if he
(1) not being a fellow of the Institute, acts as a fellow of the Institute;
(2) does not supply the information called for, or does not comply with the requirements asked for, by the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority;
(3) while inviting professional work from another chartered accountant or while responding to tenders or enquiries or while advertising through a write up or anything as provided for in Items (6) and (7) of Part I of this Schedule, gives information knowing it to be false.
Part IV
Other misconduct in relation to members of the Institute generally
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he
(1) is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term not exceeding six months;
(2) in the opinion of the Council, brings disrepute to the profession or the Institute as a result of his action whether or not related to his professional work.]
SCHEDULE II
Part I
Professional misconduct in relation to chartered accountants in practice
A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he
(1) discloses information acquired in the course of his professional engagement to any person other than his client so engaging him, without the consent of his client or otherwise than as required by any law for the time being in force;
(2) certifies or submits in his name, or in the name of his firm, a report of an examination of financial statements unless the examination of such statements and the related records has been made by him or by a partner or an employee in his firm or by another chartered accountant in practice;
(3) permits his name or the name of his firm to be used in connection with an estimate of earnings contingent upon future transactions in a manner which may lead to the [belief that he or his firm] vouches for the accuracy of the forecast;
(4) expresses his opinion on financial statements of any business or enterprise in which he, his firm, or a partner in his firm has a substantial interest;
(5) fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity;
(6) fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity;
(7) does not exercise due diligence, or is grossly negligent in the conduct of his professional duties;
(8) fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion;
(9) fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances;
(10) fails to keep moneys of his client other than fees or remuneration or money meant to be expended in a separate banking account or to use such moneys for purposes for which they are intended within a reasonable time.
Part II
Professional misconduct in relation to members of the Institute generally
A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if he
(1) contravenes any of the provisions of this Act or the regulations made thereunder or any guidelines issued by the Council;
(2) being an employee of any company, firm or person, discloses confidential information acquired in the course of his employment except as and when required by any law for the time being in force or except as permitted by the employer;
(3) includes in any information, statement, return or form to be submitted to the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority any particulars knowing them to be false;
(4) defalcates or embezzles moneys received in his professional capacity.
[(5) acts as an auditor of the company in contravention of the provisions of the Companies Act, 2013 (18 of 2013).]
Part III
Other misconduct in relation to members of the Institute generally
A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional other misconduct, if he is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term exceeding six months.
SECTION 132 : A LEGISLATIVE HISTORY
17. For the purposes of appreciating the challenge that stands raised as also to understand the imperatives which informed the introduction of Section 132, it would be apposite to step back in point of time and refer to some of the executive and legislative deliberations which preceded the incorporation of that section in the statute book. In terms of the disclosures that are made by NFRA in these proceedings, it would appear that the Union Government had for some time been contemplating the setting up and establishment of an appropriate regulatory mechanism to ensure monitoring and compliance of accounting and auditing standards as well as to oversee the quality of service rendered by professionals associated with compliance.
18. The first of those steps can be traced back to the introduction of Section 210A in the Companies Act, 1956 which empowered the Union Government to constitute the National Advisory Committee on Accounting Standards8 to advise it on the formulation and laying down of accounting policies and standards for companies or classes of companies. Section 210A as it stood in the erstwhile companies legislation is reproduced hereinbelow: –
210A – Constitution of National Advisory Committee on Accounting Standards
(1) The Central Government may, by notification in the Official Gazette, constitute an Advisory Committee to be called the National Advisory Committee on Accounting Standards (hereafter in this section referred to as the “Advisory Committee”) to advise the Central Government on the formulation and laying down of accounting policies and accounting standards for adoption by companies or class of companies under this Act.
(2) The Advisory Committee shall consist of the following members, namely:-
(a) a Chairperson who shall be a person of eminence well-versed in accountancy, finance, business administration, business law, economics or similar discipline;
(b) one member each nominated by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), the Institute of Cost and Works Accountants of India constituted under the Cost and Works Accountants Act, 1959 (23 of 1959) and the Institute of Company Secretaries of India constituted under the Company Secretaries Act, 1980 (56 of 1980);
(c) one representative of the Central Government to be nominated by it;
(d) one representative of the Reserve Bank of India to be nominated by it;
(e) one representative of the Comptroller and Auditor-General of India to be nominated by him;
(f) a person who holds or has held the office of professor in accountancy, finance or business management in any university or deemed university;
(g) the Chairman of the Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963) or his nominee;
(h) two members to represent the chambers of commerce and industry to be nominated by the Central Government; and
(i) one representative of the Securities and Exchange Board of India to be nominated by it.
(3) The Advisory Committee shall give its recommendations to the Central Government on such matters of accounting policies and standards and auditing as may be referred to it for advice from time to time.
(4) The members of the Advisory Committee shall hold office for such term as may be determined by the Central Government at the time of their appointment and any vacancy in the membership in the Committee shall be filled by the Central Government in the same manner as the member whose vacancy occurred was filled.
(5) The non-official member of the Advisory Committee shall be entitled to such fees, travelling, conveyance and other allowances as are admissible to the officers of the Central Government of the highest rank.]
19. The Standing Committee of Parliament on Finance in its 21st Report while commenting upon the Companies Bill, 2009 made the following significant recommendations:-
(F) Role of Auditors :-
34. Suggestions have been received by the Committee that there is a need to make provisions relating to Audit and Auditors more stringent such as following :-
(a) The clause should specifically prohibit offer of non-audit services both directly as well as indirectly. The term directly as well as indirectly may also be suitably defined in the Bill
(b) The prohibition proposed in the clause should be not only for the audit client company but also for the holding company, subsidiary company and associate company of the audit client company
(c) A residual clause may be inserted to provide any other kind of consultancy services to take care of any non-audit services not covered in already provided clauses.
(d) Suitable penalty may be provided in case of contravention of these provisions.
(e) (i) Clause 123(10) of the Bill empowers the Tribunal, if it is satisfied that the auditor of a company has acted in a fraudulent manner or abetted/colluded in any fraud, to direct the company to change its auditors. Suggestions have been made that these provisions should be modified to clarify to cover act of fraud or abetment by auditor whether directly or indirectly. It has also been suggested that the Bill may provide that if auditor, whether individual or firm, against whom an order has been passed by the Tribunal under this clause should not be eligible to be appointed as an auditor of any company for a period of five years.
(f) (i) This clause provides for disqualification of an auditor in case he has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed. Suggestions have been received that this clause may also be modified to cover such relationship whether directly or indirectly to prevent any misuse of these provisions by the auditors.
(g) (i) At present as per provisions of section 210A of the Companies Act, 1956, the National Advisory Committee on Accounting Standards (NACAS) has the mandate to recommend/advise the Central Government on the formulation and laying down of accounting policies and accounting standards for adoption by companies or class of companies.
(ii) The Companies Bill, 2009 has sought to enhance the role of NACAS. The Bill (Clause 118) empowers NACAS to make recommendations to the Central Government both on accounting standards as well as auditing standards. It has also been proposed in the Bill to change the title of this Committee to National Advisory Committee on Accounting and Auditing Standards (NACAAS).
(iii) Suggestions have been received expressing that in view of economic challenges being faced by many countries across the globe and failure of some of big companies in recent past casting a doubt on the role of management and auditors, there is a need to promote an independent regulatory regime which may have the power to:-
(a) recommend the standards to the Government for:
(A) corporate financial reporting,
(B) corporate audit and
(C) quality of service of professionals associated with ensuring compliance with such
standards;
(b) oversee, monitor and supervise the bodies involved in setting standards mentioned in (a) above;
(iv) It has also been suggested that the responsibility for setting financial reporting standards and auditing standards and monitoring their strict compliance should rest with the Government or a statutory authority set up by the Government. It has been expressed that setting up of such a regulatory Body would ensure healthy functioning of corporate sector, particularly in respect of financial reporting, audit and quality of service by the relevant professionals, eventually benefitting the business, investors, employees, and other stakeholders and enhance the countrys economic strength in competitive international markets.
35. On being asked, the Ministry examined the afore-said suggestions in detail, particularly in the light of provisions of clause 118 of the Bill, which seeks to provide for widening the role of NACAAS (established at present under section 210A of the Companies Act) to recommend both accounting as well as auditing standards. The Ministry, while agreeing to the different suggestions, have submitted as follows :
It may also be useful to consider giving of regulatory powers to NACAAS at appropriate stage to enforce the compliance with standards in respect of matters, after they are notified under the Companies Bill/Act and also for overseeing and monitoring the bodies involved in setting relevant standards, including on the quality of services of members of such bodies.
36. The Ministry have also suggested in this regard that :
The Central Government should have the power to constitute the NACAAS, provide for manner of appointment, selection and nomination etc of members of NACAAS by way of making suitable rules.
37. The Committee acknowledge the Ministrys acceptance of the Committees views and suggestions for ensuring independence of auditors, providing safeguards to retain credibility of the audit process and creation of a supervisory mechanism for this purpose. The Committee would recommend that the proposed body namely, NACAAS would be given sufficient mandate not only to set and oversee auditing and accounting standards, but also to monitor the quality of audit undertaken across the corporate sector. It should, therefore, be manned by professionals. Its role may be expanded depending upon experience gained.
20. The need to sufficiently empower the NACAS also appears to have formed the subject matter of consideration of that Committee as would be evident from the following extracts of the 57th Report of the Standing Committee on Finance (2011-12):-
(c) National Advisory Committee on Accounting and Auditing Standards (NACAAS) proposed to be renamed as National Financial Reporting Authority (NFRA) with a mandate to ensure monitoring and compliance of accounting and auditing standards and to oversee quality of service of professionals associated with compliance.
The Authority shall consider the International Financial Reporting Standards and other internationally accepted accounting and auditing policies and standards while making recommendations on such matters to the Central Government which will improve the competitiveness of our companies with other companies. The Authority is also proposed to be empowered with quasi judicial powers to ensure independent oversight over professionals.
21. The then Honble Minister of State in the Ministry of Corporate Affairs in the course of discussion which ensued in the Lok Sabha, which was considering the motion for passing of the Companies Bill, 2011, explained the proposed mandate of the NFRA as follows:-
NFRA is the authority that will have foresight over the monitoring, quality and service of Chartered Accountants and will take strict action against professional misconduct. NFRA will be a quasi-judicial body and the purpose will be to harmonize the global best practices so that people have confidence in the accounting systems and accounting standards in India. NFRA, I hope, will also go a long way and make assure that there is transparency in all the accounting work that we do here.
22. However, the NFRA as a regulatory body, did not come into being until much later. From the material that has been placed for our consideration, it further transpires that comments with respect to the proposed conferment of disciplinary power upon the NFRA were also sought from the Institute of Chartered Accountants of India9. The ICAI appears to have expressed various reservations with respect to such a power being vested in the NFRA. The comments of the ICAI appear to have been duly examined by the Companies Law Committee which had been set up by the Ministry of Corporate Affairs in June 2015 and which in its report submitted on 1 February 2016 observed as under:-
3.19. The Institute of Chartered Accountants of India (ICAI) have expressed their reservations over the constitution of NFRA as follows:
a) Multiple Regulatory Bodies: Creating NFRA would result in two regulatory bodies (ICAI and NFRA) governing the same audit profession. This would result in duplication of efforts, added huge costs with no significant incremental benefits. This would also change the self-regulated profession to an externally regulated body.
b) The ICAI Context: NFRA might seem necessary to ensure that standard setting and enforcement are not carried out by the same body (ICAI). However, it would be pertinent to mention that the ICAI, has been created by an Act of Parliament for this specific dual role (like SEBI).
The constitution of NFRA needs to be re-examined in the mentioned contexts where relevant mechanisms and units have been enabled by and/or within the ICAI organisation to deliver the twin objectives of robust policy making and unbiased enforcement in a timely manner.
c) Relevance of NFRA in the context of the Companies Act 2013: The objective of NFRA is to regulate audit quality and protect public interest. These, in any case, are also the main objectives of ICAI which strives to be a world class regulator. It is pertinent to note that the new Companies Act 2013 has significantly enhanced provisions, pertaining to Accounts, Audit and Corporate Governance which can deliver the above objectives very well.
Specific aspects to regulate audit quality include integration of financial statement reporting with Internal Financial Controls, restrictions on auditors rendering conflicting services, audit rotation, audit limits and penalties on the audit profession have been included in the new Act. Similarly entity level discipline is sought to be enhanced by significant controls over related party transactions, acceptance of deposits, code of independent directors, mandatory internal audits for large enterprises, enhanced board responsibility etc. These controls enshrined in the Act, in addition to the efforts of ICAI will enable higher audit quality especially for public interest entities. Incremental benefits by creating NFRA need to be reexamined before notification of Section 132.
d) Auditing Standards: ICAI as a world class regulator would be more aligned to market needs, international practices and risks to be able to define and improve Auditing standards rather than NFRA.
e) Disciplinary Mechanism: The Disciplinary Committee of ICAI normally completes the process in a reasonable period of about three to four years.
f) International benchmarks: The Public Companies Accounting Oversight Board (PCAOB) of the US may be regarded as a possible closely comparable body to NFRA, if notified. It is relevant to note that PCAOB has evoked mixed responses in its ability to improve audit quality. The PCAOB budget for 2016 is estimated at $250 million and is enabled by 750 audit staff. The Challenges of availability of trained and qualified audit staff and the cost thereof may need to be appreciated ahead of the decision to notify NFRA.
g) NFRA reporting and market perception: As a regulatory oversight body, it would be incumbent on NFRA to share their findings, at least in part, on their audits to the public. A particular issue would be on the ability and maturity of stakeholders and markets to distinguish between audit defects as identified by NFRA (highly likely) and a total audit failures (less likely).
h) Uniform administration: Scale based differentiation of regulating authority may result in conflicting judgements on the same issue. Seamless coordination may always not be possible between NFRA and ICAI due to the multiplicity of disciplinary issues that may be handled by both agencies.
i) Challenges in adjudication : The setting up and managing a standard setting, review and quasi-judicial authority requires sustained effort on timely availability of adequate competent personnel which may be a challenge for NFRA.
3.20. Further ICAI offered their following suggestions on the above:-
“The years commencing 2015 are vastly different for the auditing profession in terms of the perception of the auditors roles and responsibilities. Additionally, the CA fraternity is in the process of coping with new changes such as penalties, rotation, restricted services, Internal Financial Controls over Financial Reporting and other aspects imposed by the Companies Act. The profession would, rightly, need some more time to understand and assess the expectations of a NFRA regime which, in our view shall not be notified.
The ICAI has sufficient regulatory, supervisory, organisational and budgetary independence as regards the audit profession although we both a standard setter and a regulator. We would continue to discharge our obligations to ensure the highest standards of audit quality as well as to protect public interest.”
23. The proposed introduction of Section 132 again formed subject matter of consideration of the Standing Committee on Finance which in its 37th Report observed as follows:-
3.18. Sec 132 of the Act provides for the creation of National Financial Reporting Authority (NFRI) for matters relating to accounting and auditing standards under the Act. However this section is yet to be notified
The key functions of NFRA as envisaged by the Act include:
Recommendations to the Central Government on the formulation and laying down of accounting and auditing poli