The National Company Law Appellate Tribunal (NCLAT) has upheld the National Financial Reporting Authority’s (NFRA) orders against the erstwhile Dewan Housing Finance Corporation Ltd (DHFL) auditors.
The orders were issued in April 2023 following investigations into their professional misconduct.
In its ruling, the principal bench of NCLAT held that the NFRA has “clear and required” retrospective jurisdiction over the alleged offences by chartered accountants for the period prior to formation of NFRA, which was set up in 2018.
The NCLAT’s order holds significance as NFRA, an independent regulator of auditors, has imposed penalties on several branch auditors of the erstwhile DHFL, now Piramal Capital and Housing Finance Ltd.
In 2020, the Enforcement Directorate had reported an operation against alleged bank fraud of about Rs 3,700 crore by the promoters of DHFL, following allegations of misappropriation of public funds to the tune of approximately Rs 31,000 crore.
In reaction to the probe, NFRA had initiated an Audit Quality Review (AQR) to probe into the role of the statutory auditors of DHFL for 2017-18.
During the review, NFRA found out that 33 engagement partners/branch auditors had signed the “Independent Branch Auditors’ Report” for nearly 250 branches of DHFL.
During its investigation, NFRA investigated audit firm K Varghese & Co, which was the statutory branch auditor of 17 branches of DHFL for FY 2017-18, with Mathew Samuel, Sam Varghese, Harish Kumar T.K. and M. Baskaran, as its partners in the firm.
The partners of the firm had filed an appeal in the NCLAT saying that NFRA does not have any “retrospective jurisdiction” since it was constituted on October 1, 2018. The Appellants submitted that NFRA Rules were notified on November 13, 2018; whereas the financial statements in question pertains to FY18 and audit reports for different branch audits were given on different dates, which were prior to notification bringing NFRA into effect.
The same contention has been dismissed by NCLAT.
In its order, the NCLAT said, “NFRA, as an independent audit regulator has been entrusted by the Parliament after great debate for protecting public interest including of the creditors by exercising effective oversight over accounting and auditing functions.”
In early October, the NFRA also imposed penalties on 18 auditors and also debarred them for varying periods for lapses with respect to audits of various branches of erstwhile DHFL.
All these auditors have also been debarred for a period of six months to one year from “being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate”.