NFRA’s New Gambit: Auditor-Audit Dialogue or Judicial Backpedal?
NFRA Chairperson Ravneet Kaur, ICAI (Image credit official website)
The Indian audit landscape today demands not just enhanced engagement between auditors and companies, but transparent, independent, and fair oversight.
By P. SESH KUMAR
NEW DELHI, June 17, 2025 – In a move that signals both self-correction and strategic recalibration, the National Financial Reporting Authority (NFRA) issued a consultation paper (https://search.app/sTK6v) aimed at strengthening interactions between auditors and Audit Committees of listed companies. Ostensibly, a governance measure to improve financial transparency, this initiative comes in the shadow of a stinging rebuke from the Delhi High Court on February 7, 2025.
The Court stayed NFRA’s punitive action against 11 chartered accountants, raising fundamental concerns about due process, lack of transparency, and the problematic fusion of investigative and adjudicatory roles within NFRA. The Supreme Court’s refusal to stay the High Court’s decision in its interim view further weakened NFRA’s moral and legal standing.
The Consultation That Spoke Volumes Without Saying Much
On June 17, 2025, NFRA released a consultation paper that on its face reads like a well-meaning prescription to fix chronic ailments in corporate auditing. It proposes mandatory structured meetings between statutory auditors and Audit Committees, encouraging discussions on risk management, key audit issues, and audit quality indicators. Further, it recommends that these meetings be minuted independently and that Audit Committees submit formal feedback on the auditor’s performance, effectiveness, and independence.
To the uninitiated, this may appear to be a technical exercise aimed at reinforcing best practices. But seasoned observers detect something more subtle: a tactical manoeuvre to pivot the conversation away from NFRA’s controversial disciplinary powers and toward a softer governance approach. One cannot miss the fact that the consultation paper comes barely four months after the Delhi High Court’s landmark judgment, which fundamentally questioned the procedural integrity of NFRA’s disciplinary regime.
Delhi High Court’s February Blow: Transparency, or the Lack of It
On February 7, 2025, the Delhi High Court issued a stay on NFRA’s enforcement action against 11 Chartered Accountants involved in a high-profile case. The judgment was a watershed moment in India’s audit regulation landscape. It faulted NFRA on two critical counts: lack of transparency and procedural fairness. The Court held that the same body investigating and then adjudicating audit failures created an inherent conflict of interest, violating natural justice. Furthermore, it found that NFRA had provided inadequate opportunity for the auditors to be heard, with opaque procedures that failed to meet even the minimum threshold of fair inquiry.
What made matters worse for NFRA was that its actions came in a period where confidence in regulatory institutions had already been dented—thanks to earlier episodes involving SEBI and the ED, which were accused of overreach and opacity. In this context, NFRA’s procedural laxity appeared not just as a flaw in form but a fundamental threat to institutional legitimacy.
The Apex Court’s Silence Speaks Volumes
NFRA’s troubles deepened when it moved the Supreme Court seeking relief from the Delhi High Court’s stay. But the Supreme Court, while agreeing to hear the case, declined to stay the High Court’s decision in its interim observations. The silence of the apex court on this issue was deafening. It signalled that the Court was not in a hurry to endorse NFRA’s punitive style of enforcement without adequate safeguards.
In regulatory circles, this was read as a subtle but firm message: quasi-judicial bodies cannot continue to function as law unto themselves. Even if endowed with statutory powers, institutions like NFRA must evolve internal mechanisms that pass the constitutional test of fairness and separation of powers.
A Strategic Retreat Disguised as Reform?
It is in this context that the new NFRA consultation paper must be situated. Critics argue that the paper is less about improving auditor-audit committee coordination and more about changing the optics. By projecting a consultative, collegial tone and emphasizing “quality enhancement” over “disciplinary policing,” NFRA seems to be attempting a reset of its public image.
This is not the first time a regulatory agency has resorted to procedural reform to buffer itself from legal and political heat. In the past, the Securities and Exchange Board of India (SEBI) too initiated stakeholder consultations on market reforms following setbacks in insider trading cases. NFRA appears to be taking a page from the same playbook—using softer governance interventions to regain lost legitimacy.
But whether this is a genuine reform or a smokescreen will be revealed only in implementation. For instance, will the feedback submitted by Audit Committees be used as a constructive metric or as another regulatory stick to beat auditors with? Will these new consultative platforms be subject to oversight, or will they function as closed-door rituals with no transparency? More importantly, will NFRA amend its own disciplinary rules to separate its investigative and adjudicative roles?
Between Judicial Censure and Regulatory Introspection
NFRA’s consultation paper on strengthening auditor-audit committee interaction is, in isolation, a well-drafted step forward in improving audit quality and governance. But in context, it also reads like a damage control exercise by a regulator caught in the crosshairs of judicial censure and professional pushback. The February 2025 Delhi High Court judgment did not merely expose NFRA’s procedural weaknesses—it questioned its very architecture. And the Supreme Court’s non-intervention offered no comfort to the regulator.
Unless NFRA backs up this consultative exercise with structural reforms in how it conducts investigations and adjudicates violations, its initiatives will be seen as cosmetic. The Indian audit landscape today demands not just enhanced engagement between auditors and companies, but transparent, independent, and fair oversight. NFRA’s future lies in recognising the difference between the two—and acting on it before the next judicial intervention leaves it with even less regulatory ground to stand on.
(This is an opinion piece; views expressed solely belong to the author, who served as DG in the CAG)
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