Corporate laws (Amendment) Bill 2026 - Proposals affecting auditors
Published: Apr 16, 2026
By Ramanujam Srinnvasan
Introduction : THE corporate laws (Amendment) Bill introduced in the Parliament during last month had two distinct objectives - to amend LLP Act and the Companies Act 2013 respectively (Chapters II & III). A short statement of objectives explained in brief the reasons behind the proposals which inter alia stated that (a) decriminalisation of various procedural defaults under the Companies Act and the LLP Act by replacing criminal provisions with civil penalties; (b) simplification of procedures….(o) strengthening the role of the National Financial Reporting Authority. In this article, few aspects of the amendments involving NFRA are highlighted to draw attention of the auditing community and how they need to protect themselves if they wish to pursue a career in audit especially of listed entities.It is sad to note that the government's views expressed through these amendments which is -'only the auditors are responsible for all the ills prevailing in the Corporate world and not the promoters, directors /independent directors and other high paid executives who,all need to provided full immunity !'
Few amendments introduced in the Bill -(discussion confined only with reference to amendments)
Part 1: - clause 40
Whether NFRA wants to act as prosecutor, jury & judge-all by itself?
This view is again reinforced by the specific amendments extracted below. Earlier we could notice this view only in their orders but now it is more openly expressed by the following amendments:
Amendment to sec 132(4) - new substitutions
Where professional and other mis conduct is proved, NFRA will have the power to make order for -
"C) issuing an advisory, censure or warning to the member or the firm;
(D) requiring additional professional training of the member or individual partners or employees of the firm;
(E) referring the matter to the Central Government for taking action under the provisions of this Act or rules made thereunder."
Penal Provisions Under 132 (4A)
- fails to comply with NFRA order or pay penalty within 90 days from the date of receipt of the Order -
(i) Imprisonment extendable to 6 months or
(ii) Fines ranging from Rs 1 lac to Rs 5 lacs in the case of Individual auditor;
(iii) Fines ranging from Rs 5 lacs To Rs25 lacs in the case of a firm
(16) No act or proceeding of the National Financial Reporting Authority shall be invalid merely by the reason of-
(a) any vacancy in, or any defect in the constitution of such Authority; or
(b) any defect in the appointment of a person acting as a member of such Authority; or
(c) any irregularity in the procedure of such Authority not affecting the merits of the case.
My Views:
(i) (I) in this connection, one cannot help but to recall the SC judgment in the case of ICAI v L. K Ratna (1986)
It was held: "The Council holding the respondents guilty of professional Misconduct is vitiated by members of disciplinary Committee "
NFRA has Breached this golden rule in all its orders passed till date.
132 (4A) Penal provisions - absurd; imprisonment for not paying fine within 3 months; very very harsh; should be removed forthwith.
(ii) 132 (16) -
"any irregularity in the procedure of such Authority not affecting the merits of the case."
This type of legislation is very new and probably this may become a standard clause in all the statutes; courts have consistently held that all procedures should be strictly adhered to before punishing a person but here a new jurisprudence is evolved; this should be objected and removed
Part II:
Appointment of auditor-new procedure?
Clause 41 -
New sec 132A -appointment of auditors - is to be pre-approved by NFRA? funny provisions:
Requirements (summarized)
Auditors to file a form with NFRA indicating ICAI registration no. etc. along with prescribed fees- Section 132 A sub-sections (1) & (2). Sub-section (3) says if details are not furnished, fine of Rs. 25,000/- plus fine of Rs. 5,000/- for every day of default.
My comments:
(i) This is funny: If appointment is declined by the auditor by not giving information, he need not be appointed; one cannot be penalized for declining an offer.
(ii) Additionally, the form may require to state the experience possessed by each partner, staff, etc. If there is an error in any of these statements, there will be a penalty levied. This is absurd as very few Indian CA firms (other than MNC audit Firms) have an HR department to cross-verify the antecedent experiences of the CA joining in his firm except to rely on his statement.
(iii) It may be noted that there cannot be any penalty even before commencement of audit assignment and at best the audit firm can be blacklisted for a brief period.
(iv) In listed companies, once the tenure of the auditor is over, some new firms are shortlisted by the Board and the list forwarded to the audit Committee which will evaluate the Firms and make their recommendations to the Board.
(v) Now in the new scenario, there Is an encroachment by NFRA into the role of the Audit Committee functioning of a listed company.
(vi) Again, it is to be remembered that under sec 139 of the Companies Act, auditors are appointed by shareholders from the conclusion of the AGM till the conclusion of its sixth AGM following. In the sixth year, since Q1 & Q2 results will be audited by the old auditor, the new auditor becomes the joint auditor so that he has full view of the sixth-year's annual accounts.
Now the only way to make sense out of the new proposal contained in sec 132A is to think that NFRA would like to have a panel of auditors to choose as an auditor of listed companies. Many new start-up companies which have gone for IPOs recently can find themselves stranded as they may not be able to pay the fees of auditors fully approved by NFRA.
Section 132A (4): This is the harshest provision. Penalty for false statement can go up to Rs. 50 Lacs.
My comments:
On the one hand the government is saying they have decriminalized many provisions, but now every action is targeted towards auditors. Very strange.
Sec 132C-Any directions given by NFRA to the auditors in the interest of public, creditors or investors, etc. if not complied, there will be a fine up to Rs. 50 lacs.
Again, the role of the company or its directors and other officers are lost sight off in this proposed amendment.
Two other amendments: clause41
132E. No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the National Financial Reporting Authority is empowered to determine by or under this Act and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken by the said Authority in pursuance of any power conferred by or under this Act.
132F. No suit, prosecution or other legal proceeding shall lie against the Central Government or the National Financial Reporting Authority or the chairperson or any member or any officer or other employee of Authority for anything which is in good faith done or intended to be done under this Act or the rules or regulations made thereunder.
132K. The Authority shall, prior to issuing regulations under section 132J, ensure transparency by--
(a) publishing the draft regulations along with all relevant details on its website and inviting public comments for such period as may be specified therein; and
(b) reviewing such regulations at least once in three years:
Provided that if the Authority is of the opinion that it is necessary or expedient to make, or amend, any regulations urgently in public interest, or where the subject matter of the regulations relates solely to the internal functioning of the Authority, it may, for reasons to be recorded in writing for doing so, make or amend such regulations without following the procedure specified in clauses (a).".
My comments :
All these amendments are to only to decorate NFRA as well as to punish the auditors for wrong doings of others and not looking at the main cause-which Is the Indiscipline and shortcuts adopted by the Board of Companies.
Part III:
Existing issues with NFRA's approach:
From the auditors' point of view:
(i) All their findings in various cases imposing penalties / punishments are controversial / highly debatable.
(ii) NFRA is unable to understand the different roles played by the Board which is entrusted with the preparation of accounts and the role of the auditor in carrying on the audit functions
(iii) NFRA in almost all cases where they have punished the statutory auditors, have relied only on American Oversight Board orders which are irrelevant in the Indian context; As is well known Indian Companies Act and audit procedures are drawn or modelled on UK Companies Act. Neither the NFRA nor ICAI is ready to educate the statutory auditors about the USA law or the jurisprudence prevailing in that country.
(iv) Many of the NFRA audit findings as revealed in their orders are questionable; some cases are already pending in the Courts against these orders. For instance, in one case where the auditors have qualified their report, NFRA says one should have disclaimed. This opinion is subjective. Similarly, when the auditor has relied on a legal Opinion, the NFRA says the auditor should not only rely on the opinion of the advocate but should have formed an independent opinion which should be explicitly recorded in their working papers. This view is absurd. As is well known only lawyers can interpret legal provisions and not auditors
(v) In all instances, The Board of directors who, after signing the directors' responsibility statement escape fully, whereas the auditors who have completed the task of audit to enable the business entities to move ahead from one audit period to another, get their views and opinions questioned belatedly especially when the entire audit team / partners have moved away from the audit firm, making the continuing partners to answer the issues that were considered by the erstwhile auditors. Like doctors, all ailments of a patient cannot be noticed fully on a particular occasion or during a single visit to the clinic. At best it is an opinion expressed by the auditor at a particular time based on his experience and skills possessed by his team.
(vi) Audit fees is not commensurate with the tasks entrusted under the Act-accounting standards / auditing standards, constant attrition in audit firms year after year, pose multiple problems.
(vii) No specific roles are spoken about in identifying the lapses caused by the company's internal audit department, secretarial department, etc. before blaming the statutory auditor for audit lapses.
Company vis-a-vis NFRA:
(i) Depending on the size of the company, the company employs experts in their accounting department. In small companies which have recently gone public for instance, most of the tasks are delegated to the auditors to complete the work by requesting them to help / educate the staff of the company with regard to Ind AS regulations, etc. and their applicability to the facts in the Company. This position can be changed only if it is mandated that every company should compulsorily appoint a Chartered Accountant as the Head of the accounting function, who should also put in minimum CPE hours at the classes of ICAI (as is well known, Industry executives' participation in ICAI seminars are abysmal).
Other amendments having an impact on the auditor's role:
(i) Insertion of new subsection 139 (12) - clause 44
"(12) Such class or classes of companies which fulfil such conditions as may be prescribed shall not be required to appoint auditors under this Chapter.".
(ii) In section 141 (1)- insertion of second proviso: clause 45
"Provided further that every partner of the firm shall be a person who has been registered with statutory institute or body established under a law in India having powers of such registration.".
(iii) In section 144 - substitution of the existing proviso: clause 46
"Provided that an auditor or audit firm of such class or classes of companies, as may be prescribed, shall not provide, directly or indirectly, any non-audit services to the company or its holding company or subsidiary:
Provided further that the restriction under this section shall also apply for a period of three years after the auditor or audit firm has completed his or its term under sub-section (2) of section 139":
My comments:
Sec 139(12) is aimed to provide audit relief to small companies. This is meaningless and works against the basic principle of companies as expressed in Solomon v Solomon-which established the foundational law that companies are different from the persons incorporating them and as the new corporate entity, the company can have a separate existence and personality to act independently away from the owners. When the Income tax was amended to exempt conversions of sole proprietorship, partnership firms, LLPs, etc. to companies from the purview of capital gains taxation (Section 47- transactions not regarded as transfer), It was stated that there will be more discipline once the corporate form is achieved by these entities with regard to their financial transactions. Exempting small companies from the purview of audit will lead to many new companies surfacing or shrinking their activities to fall within the limits that may be prescribed.
Long ago, a business group in Gujarat floated more than 1300 trusts and 330 companies to escape from high taxation of more than 70% prevailing at that time (combined tax rate of income tax, wealth tax, surtax, etc.)
The question is-who benefits by this amendment and what is the purpose achieved by this amendment?
My comments on section 141 amendment:
Just like chapter XXII of the Companies Act incorporating the provisions for companies incorporated outside India, there can be a situation allowing foreign CA firms to operate in India by enacting special provisions for registration, in terms of Free Trade Agreements with certain countries. This amendment may come in handy at that time. Is it possible to identify the underlying purpose now?
Memorandum explaining the amendments is woefully inadequate and does not explain any rationale for any amendment-unlike the income tax Act
Amendment To sec 144: -
The words "non-audit services" or "directly or indirectly" or "subsidiary" are all very wide terms which can be stretched to any extent (subsidiary can include 51% control or Board control also).
Companies appointing different persons (experts) for different functions will increase the cost of compliance as every auditor would like to start all over again to familiarise and proceed afresh by reinventing the wheel all over again.
The extension of the cooling period is also irrelevant as what is to be seen is the quality of work and not imposing restrictions on competent firms who are / will be engaged by companies having eminent persons in the Board.
Recent case - Charmi M shah - interim order by the Hon'ble Delhi HC
An interesting Issue regarding the jurisdiction of NFRA to issue show cause notice (SCN) to an Engagement Quality Control Reviewer (EQCR) Of a firm- M/S Dalal & Associates with regard to the audit of company known as Man industries (India) Limited was reported recently. The argument Of the petitioner was that by definition, as per the Auditing Standard-220, EQCR is not the auditor of the company and therefore NFRA which has its own definition of the word 'auditor' in its rules is empowered to Issue SCN only to statutory auditor Of the company and not to EQCR. In this judgment, the Court extracted the following portions from a similar case decided earlier and which is also pending for final orders.
Relevant extracts from the case cited :
The definition of EQCR as per Auditing Standard-SA 220 is asunder :
"(c) Engagement quality control reviewer - a partner, other person in the firm, suitably qualified external person, or a team made up of such individuals, with sufficient and appropriate experience and authority to objectively evaluate, before the report is issued, the significant judgments the engagement team made and the conclusions they reached in formulating the report. However, in case the review is done by a team of individuals, such team should be headed by a member of the Institute."
It can be seen that an engagement quality control reviewer can either be a person within the same firm which is conducting the audit or even an external person
On the other hand, rule 3 of the NFRA rules which confers the jurisdiction to NFRA to issue SCN defines "auditor " as under
"2. (d) "auditor" means an individual or a firm including a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008 (6 of 2009) or any other Act for the time being in force, who has been appointed as an auditor of a company or a body corporate under Section 139 of the Act or under any other Act for the time being in force;"
The Court felt that - it appears, prima facie, that the EQCR partner would not fall within the ambit of the aforesaid definition inasmuch as the EQCR partner is neither appointed as the statutory auditor under Section 139 of the Companies Act. Importantly, Rule 11 of the NFRA Rules which deals with the power to initiate disciplinary proceedings contemplates that a show cause notice shall be issued "to the auditor"; it does not contemplate taking of disciplinary action against any other professional/s.
The Counsel of NFRA argued that since EQCR is a CA, NFRA has jurisdiction to issue SCN.
After hearing the arguments and looking at certain cases decided, the Court, in this case allowed the proceedings by NFRA to continue but ordered that no final orders should be passed till the Court passes the final judgment regarding the challenge to jurisdiction issue, raised by the petitioner.
Conclusion:
In my view, the provisions highlighted above are all aimed in a way to put down / undermine the role of the auditors. The ICAI should speak to some MPs or legal experts to reason out with the government or challenge few provisions with regard to their constitutional validity.
