Context: The National Company Law Appellate Tribunal (NCLAT) has recently confirmed the retrospective power of the National Financial Reporting Authority (NFRA) over audits conducted before 2018.

• The decision came as the principal bench of the NCLAT dismissed appeals from branch auditors of a non-bank lender which was later acquired by another group through a court-supervised debt resolution plan.

• 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

Key Findings of the NCLAT

Retrospective Power of NFRA

• NCLAT has confirmed NFRA's retrospective power over audits conducted before its establishment in 2018.

• NFRA can initiate investigations even for misconduct occurring before 2018, the date of notification of its rules and powers.

Mandatory Compliance with Auditing Standards

• The tribunal underscored the mandatory nature of Standards of Auditing (SAs) and their retrospective applicability.

• NFRA's authority to initiate investigations is affirmed, irrespective of peer-review certifications from the Institute of Chartered Accountants of India (ICAI).

Role of Branch Auditors

• NCLAT dismissed the argument that the role of branch auditors is limited, emphasizing their critical contribution to the overall audit process.

About National Financial Reporting Authority (NFRA)

• NFRA was constituted in 2018 by the government of India under section 132 (1) of the Companies Act, 2013.

• It is an independent regulator set up to oversee the auditing profession and the Indian Accounting Standards.

• Aim: To improve the transparency and reliability of financial statements and information presented by listed companies and large unlisted companies in India.

• It can initiate investigations Suo motu, especially in cases involving large financial frauds or matters of public interest.

Functions and Duties of NFRA

As per Section 132 (2) of the Companies Act, 2013, the duties of the NFRA are to:

• Recommend accounting and auditing policies and standards to be adopted by companies for approval by the Central Government;

• Monitor and enforce compliance with accounting standards and auditing standards; and

• Supervise service quality in professions related to standards compliance and recommend improvements.