National Financial Reporting Authority ( NFRA ) debarred and imposed fines on 103 CAs from 2022 to 2025. It has debarred 85 Chartered Accountants until 2025 ranging from 6 months to 10 years. It is based on the seriousness of the audit defaults.

The NFRA was conferred wide-ranging powers to regulate financial reporting and audit quality, promote transparency, and preserve the integrity of India's financial reporting system. It has the power to investigate the specified classes of companies and impose penalties for professional misconduct by a chartered accountant or a firm under Section 132(4) of the Companies Act, 2013.

Analyzing the Law Behind the Tax - Click here

The Chartered Accountants were punished with six months to 10 year debarment when the audit lapses were reported and it is confirmed through the investigation of the NFRA. According to the NFRA orders, the partners in the engagements were found to be guilty of professional misconduct on several grounds. These involved a lack of exercise of due care in ensuring if the company had met the terms of Section 139 of the Companies Act about the appointment of the auditor.

In addition to this, they showed gross negligence in the performance of their professional work. They also failed to secure adequate and relevant audit evidence required for the forming of an audit opinion, or where the absence of such evidence was material enough to prevent the expression of an opinion.

Additionally, they did not report material deviations from the generally accepted auditing procedures relevant to the conditions of the audit. These professional and ethical lapses deserved disciplinary action in the way of temporary debarment.

Analyzing the Law Behind the Tax - Click here

In October 2023, NFRA penalized 18 branch auditors who were engaged in branch audits of DHFL at ₹18 lakh (₹1 lakh per auditor) with debarment periods between 6 months to 1 year.

The key default identified under the debarment of the CA of who were part of the Engagement Team for the statutory audit of Coffee Day Enterprises Limited ('CDEL') is below:

There were defaults in auditing compliance with Section 185 of the Companies Act, 2013, and serious inadequacies in accepting the audit engagement, developing the audit opinion, and performing the Engagement Quality Control Review (EQCR).

Analyzing the Law Behind the Tax - Click here

The NFRA held the audit firm and the Engagement Partner (EP) liable for various violations of professional conduct under the Chartered Accountants Act, 1949. These were:

• Clause 5 of Part I of the Second Schedule: The firm and EP failed to disclose material facts known to them—specifically, the diversion of funds to the promoter entity—which were necessary for presenting a true and fair view of the financial statements.
• Clause 6 of Part I of the Second Schedule: They did not report material misstatements in the financial statements, thus hiding fraudulent activities that should have been reported.
• Clause 7 of Part I of the Second Schedule: The firm, EP, and EQCR were also grossly negligent and failed to exercise due diligence in fulfilling their professional responsibilities. This involved a failure to comply with the Standards on Auditing (SAs), a failure to report material misstatements, and a failure to conduct sufficient engagement quality reviews.
• Clause 8 of Part I of the Second Schedule: The firm and EP did not get adequate audit evidence. They did not confirm the bank statements of subsidiaries, did not investigate the end use of loans made by CDEL to subsidiaries, and did not investigate the application of loans taken by subsidiaries on the strength of guarantees extended by CDEL.
• Clause 9 of Part I of the Second Schedule: The auditors did not bring to the attention of the management material deviations from accepted auditing practices, hence violating essential professional standards such as the Quality Control Standards and the Code of Ethics.
• Clause 8 of Part I of the First Schedule: The auditors took on the audit engagement without adequate communication with the outgoing auditor, hence violating norms in auditor rotation.

These professional misconducts not only eroded the credibility of the audit process but also helped in hiding major financial irregularities. Consequently, the NFRA imposed 10-year debarment. There are several other misconduct and lapses which the financial reporting authority found in different cases.

Analyzing the Law Behind the Tax - Click here

The NFRA slapped one of its strongest punishments on CA and his firm in January 2024 for professional misconduct in the statutory audit of Seya Industries Limited (SIL) of the financial years 2018-19 and 2019-20.  The inquiry was launched based on information received from the Securities and Exchange Board of India (SEBI) about non-adherence to accounting standards. He was charged with charges such as failure to preserve audit files and non-cooperation with the NFRA. The authority levied a monetary fine of ₹20 lakh and debarred CA and his audit firm for ten years.

In the auditor of Seya Industries Limited's case, the NFRA noted that "It is an auditor's responsibility to carry out the audit with professional skepticism and due care and state his opinion in an impartial manner. Statutory audits present valuable information to the stakeholders and public, on the basis of which they make their investment decisions or conduct transactions with the public interest entity."

Similarly, several other instances of professional misconduct also drew the attention of NFRA, resulting in temporary debarment of the concerned chartered accountants.

NFRA ENFORCEMENT ACTIONS

NFRA's enforcement measures between 2022 and 2025 debarred CAs for a duration of between 6 months to 10 years, illustrating the authority's balanced response to varying degrees of misconduct. In the case of minor violations or first-time defaults, the authority generally prescribed shorter debarment durations ranging from 6 months to 3 years.

Analyzing the Law Behind the Tax - Click here

More severe offenses, especially those touching on recklessness, willful misconduct, or not cooperating with investigations, which impact the financial status of the nation, lead to more extended debarment times ranging from 5 to 10 years, as illustrated in the Reliance Capital, DHFL and Seya Industries cases. Financial penalties also differ considerably depending on the extent of the misconduct and the professional's role.

NFRA DEBARMENT IMPACT ON CA PROFESSIONALS

The NFRA's enforcement actions have had a huge impact on India's accounting and auditing profession. By debarring 85 chartered accountants and imposing fines on 103 professionals between 2022 and 2025, the authority has sent a clear message about the consequences of professional misconduct.

The actions of the authority have also brought to the fore certain areas of concern in audit practice, such as poor documentation, lack of due diligence, non-adherence to accounting standards, and improper assessment of evidence. Through enforcement action, the NFRA has assisted in the identification of key areas for improvement in the profession.

Analyzing the Law Behind the Tax - Click here

In addition to the disciplinary actions of the ICAI, NFRA’s enforcements also impact the professionals who failed to perform their duties clearly.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates