Audit watchdog to split disciplinary & probe functions, set up 4 divisions

The National Financial Reporting Authority (NFRA) is setting up separate wings for investigation and disciplinary functions to avoid any perceived conflict of interest involving its staff with overlapping responsibilities, in the first major operational restructuring of the regulator since it was set up in 2018.

In an order dated April 28, the audit watchdog proposed to undertake its regulatory and supervisory functions through four distinct divisions. It will have a division each for monitoring and oversight, investigation, determination of professional misconduct and disciplinary action, moving away from a loose but flexible operational set-up. ET has seen a copy of the order.

The move followed a Delhi High Court order last year that upheld the NFRA’s power to probe lapses by auditors and firms but quashed its show-cause notices to certain auditors and firms, saying its procedure lacked attributes of neutrality and a dispassionate appraisal.

The High Court had asked the regulator to separate its audit review and disciplinary functions to ensure procedural fairness.

Experts said the court order essentially means the same set of people can’t be in charge of both audit quality review and disciplinary actions.

However, the high court left it to the regulator to start the proceedings afresh against the auditors and firms if it so chose, but in keeping with its directive.

The NFRA subsequently challenged the quashing of its notices in the Supreme Court. The regulator’s restructuring order has now been submitted with the apex court, which will next hear the case on May 14.

The new set-up

The monitoring and oversight division, to be headed by full-time member Smita Jhingran, will decide whether a case warrants investigation, based on a prima facie assessment of professional misconduct.

The investigation division, under full-time member P Daniel, will then gather evidence and probe the case.

The determination division, to be presided over by full-time member Sushil Kumar Jaiswal, will consider the findings of investigation and ascertain whether there are enough reasons to take penal actions.

Finally, the disciplinary division under NFRA chairman Nitin Kumar Gupta will issue show-cause notices to errant auditors, adjudicate and pass the final order.

Further restructuring likely

The latest restructuring, the regulator said, is an “interim measure” until the proposed Corporate Law Amendment Bill, 2026, is passed by Parliament and rules and regulations under it are framed, or until the Supreme Court disposes of a batch of petitions dealing with the matter, whichever is earlier. This indicates further restructuring is likely in the coming months.

The Corporate Law Amendment Bill, which proposes more power to the NFRA, was introduced in the Lok Sabha last month and referred to a joint committee of Parliament for scrutiny. The corporate affairs ministry will incorporate the House panel’s suggestions and place the revised bill before Parliament for approval.