The High Court highlighted that Section 132 was introduced to strengthen regulatory oversight and align audit standards with global best practices. It does not create new liabilities but fills a regulatory gap to enhance transparency, accountability, and audit quality.
The Delhi High Court has upheld the constitutional validity of Section 132(4) of the Companies Act, 2013 and the National Financial Reporting Authority (NFRA) Rules, 2018, dismissing multiple petitions filed by Chartered Accountants (CAs) and auditing firms challenging the provisions. The Division Bench of Justice Yashwant Varma and Justice Dharmesh Sharma ruled that the objections raised were devoid of merit concerning vicarious liability, retroactive application, and violation of Article 20(1) of the Indian Constitution.
Challenges Raised Against Section 132 & NFRA Rules
The petitioners argued that:
- Retrospective enforcement of Section 132 allows NFRA to initiate disciplinary proceedings for audits conducted before the provision’s introduction, violating due process and fairness principles.
- NFRA’s disciplinary procedures lack procedural safeguards compared to those under the Chartered Accountants Act, 1949, creating a conflict of interest where NFRA acts as both prosecutor and judge.
- The vicarious liability imposed on firms and partners contradicts established legal principles, making them accountable for audits conducted under prior regulations.
- The absence of cross-examination rights under NFRA proceedings renders the process unfair and arbitrary.
High Court’s Ruling on Key Issues
- Vicarious Liability of Audit Firms
The High Court emphasized that an auditing firm and its members function as an integrated entity, ensuring professional service quality. Thus, firms cannot distance themselves from the professional conduct of their partners. The collective responsibility of firms makes the imposition of vicarious liability justified and logical.
- Retrospective Application & Article 20(1)
The High Court clarified that statutes are generally presumed to be prospective, unless explicitly stated otherwise. Section 132 does not create a new category of misconduct but adopts the existing definition under Section 22 of the Chartered Accountants Act. Since professional misconduct was already penalized under prior laws, auditors cannot claim a vested right to immunity for actions committed before the enactment of Section 132.
- Procedural Fairness & NFRA’s Role
The High Court noted that:
- NFRA disciplinary proceedings adhere to principles of natural justice, including providing the charged entity an opportunity to be heard.
- Unlike the Misconduct Rules, 2007, NFRA proceedings do not arise from individual complaints but are initiated based on audit quality reviews, government references, or suo motu investigations.
- The denial of cross-examination rights does not make the NFRA Rules arbitrary, as proceedings are based on audit records rather than oral testimony.
Also Read: Functions, Duties and Powers of the National Financial Reporting Authority (NFRA)
Legislative Intent Behind Section 132
The Court highlighted that Section 132 was introduced to strengthen regulatory oversight and align audit standards with global best practices. It does not create new liabilities but fills a regulatory gap to enhance transparency, accountability, and audit quality.
Final Verdict
The Court upheld the validity of Section 132 and the NFRA Rules, rejecting claims of arbitrariness, retrospective application, and conflict of interest. However, it cautioned that NFRA must adhere to its legislative mandate by maintaining a clear separation of roles in enforcement and regulatory oversight.
This landmark judgment reaffirms NFRA’s authority in regulating auditors and ensuring professional accountability, reinforcing India’s corporate governance framework.
Also Read: Accountability for ensuring ‘True and Fair View’ in Financial Statements
Case Reference: Deloitte Haskins v UOI, W.P.(C) 1065 of 2021, decided on 07-02-2025
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