Doctrine Of Vicarious Liability Of Audit Firms: Deloitee V India

Introduction

The doctrine of vicarious liability, which forms the fundamental base of Indian tort and corporate law, renders one party legally liable for another’s acts under certain conditions. Based on common law, this principle comes into play when a master is liable for acts done by a servant in the scope of employment if the relationship is that of a contract of service—i.e., employer-employee or master-servant[1]. A significant application of this doctrine comes in financial regulation, where the role of auditors is important to provide transparency and compliance. Their duties expose them to scrutiny, as evident in Deloitte v. Union of India. Here, the Delhi High Court has considered whether it is possible for auditing firms to be held liable vicariously for the malfeasance of their partners or employees under the Companies Act, 2013. This decision is helpful to understand how the courts view the responsibility of auditors in upholding financial integrity and their responsibility in the event of financial dishonesty.

The Doctrine of Vicarious Liability of Auditors: Deloitte v. Union of India

Facts of the Case

A group of petitions was presented by Chartered Accountant individuals and audit firms challenging the constitutional validity of Section 132(4) of the Companies Act, 2013, and the National Financial Reporting Authority Rules, 2018 (NFRA Rules)[2]. The petitioners argued that these provisions inflict vicarious liability to audit firms and partners in an unjust manner, which breaches the fundamental rights under Articles 14 and 19(1)(g) of the Indian Constitution. It was challenged on the grounds that the provisions retrospectively impose penalties and disciplinary action for audits done prior to the passage of Section 132, and are against the principles of fairness and due process.

The petitioners contended that making a Limited Liability Partnership (LLP) liable for the conduct of its partners in terms of audit duties leads to unjust imposition of liability on all the partners, even those who weren’t involved in the alleged misconduct. They were based on Sections 27, 28, and 30 of the Limited Liability Partnership Act, 2008 (LLP Act), which state that a partner is not liable for the wrongful act of another partner unless directly involved. They also contended that the Companies Act, 2013, was enacted subsequent to the LLP Act and, hence, could not be interpreted in a way that pre-empts the protection provided under the LLP Act.

However, the respondents argued that when a company is hired as an auditor, its partners are agents and representatives of the company. The respondents argued that Accounting Standards (AS) require an auditor to have control and supervision over audit activities, that is, an audit firm cannot disassociate and escape itself from the acts of its partners. Also, the respondents referred to Sections 25 and 26 of the Indian Partnership Act, 1932, and Section 27(2) of the LLP Act in arguing that audit firms should be made responsible for their partners’ acts during the course of business.

Analysis

The core question of this case is the principle of vicarious liability—whether an LLP or an audit firm has to be held liable for the conduct of its partners and whether the liability violates constitutional principles. The petitioners had contended that the imposition of vicarious liability violates the LLP Act, which protects partners from being made liable for others unless direct participation is shown. Also, they alleged that retrospective operation of Section 132 contravenes Article 20(1) of the Constitution by imposing punishment for conduct prior to the coming into operation of the provision.

The Delhi High Court analyzed the partnership between an audit firm and its partners in providing auditing services critically. The court noted that auditing is a very integrated activity where roles overlap, and an audit firm cannot dissociate itself from the actions of its partners. The judgment highlighted that the nature of auditing services requires collective responsibility, and any misbehavior by a partner has to be viewed as part of the firm’s overall responsibility.

In interpreting Sections 27 and 28 of the LLP Act, the court noted that the phrase “in the course of business” encompasses audit functions performed by engagement partners[3]. As such, an LLP can be liable for the wrongful acts or defaults of the partners in carrying on auditing business. Although Section 28(2) of the LLP Act indicates that no partner is individually liable for a wrong done by any other partner, the court interpreted that in case an audit firm is elected to be the auditor, the action of the engagement partner becomes the firm’s duty. This interpretation successfully brings LLP liability in line with that of conventional partnership firms under the Partnership Act, 1932, where partners have joint and several liabilities.

In addition to this, the court negated the contention that Section 132 places an unprecedented liability on auditors. It emphasized that Section 147 of the Companies Act, 2013, being earlier than Section 132, itself provides for firms and also individual engagement partners to be held liable. The petitioners’ contention that Section 132 introduces a new liability was thus found to be unsubstantiated.

Judgment

The Delhi High Court reaffirmed the validity of Section 132 of the Companies Act, 2013, and the NFRA Rules, and disallowed the challenge based on vicarious liability, retrospective effect, and contravention of Article 20(1). The court reinforced that the appointment of an audit firm necessarily involves the joint obligations of its members justifying imposition of vicarious liability.

The court ruled that the vicarious liability of audit firms is warranted because auditing services are integrated in nature and call for a shared responsibility regime. The appointment of the firm as an auditor includes the collective duties of its partners, and the firm cannot be immune from its members’ wrongful acts. The court clearly stated that “there cannot possibly be a cavil of doubt respecting the well-established rule that statutes are normally presumed to be prospective in their operation. No less well-established is the rule of presumption being dispelled only if a court were to hold from the words of an enactment or a provision that the lawmaker so intended.”

With regard to the challenge on the basis of retroactive operation, the court made it clear that Section 132 does not introduce new liabilities but only imposes existing enforcement mechanisms. The definition of “professional or other misconduct” under Section 22 of the Chartered Accountants Act, 1949, does not change, and auditors have always been liable to be dealt with for professional misconduct. Section 132 therefore does not retrospectively introduce penalties for what were hitherto allowable actions but only tightens enforcement mechanisms.

Further, the court rejected procedural fairness concerns under the NFRA Rules. It noted that the NFRA Rules provide for compliance with the principles of natural justice, such as affording charged parties opportunities to put forward their case. The NFRA makes referrals on the basis of audit reports and not on the basis of complainants’ testimonies, thus obviating the necessity for cross-examination in disciplinary actions.

Conclusion:

Delhi High Court’s ruling in Deloitte v. Union of India reiterates the law of vicarious liability in auditing, focusing on collective responsibility by audit firms. By affirming Section 132 of the Companies Act, 2013, and the NFRA Rules, the court confirmed that auditing companies cannot distance themselves from their partner’s misconduct, since their work is integrated. The judgment points out that an LLP’s liability is in line with that of conventional partnership companies, promoting accountability in financial management. The court also dismissed claims of retroactive effect, stating that Section 132 only imposes existing accountability and not new liabilities. In addition, procedural protections under the NFRA Rules were deemed to be in line with natural justice principles. This ruling enhances regulatory control of auditors, solidifying their position in ensuring financial integrity and confirming the legitimacy of vicarious liability in corporate governance.

[1] Mohan, M.P.R. and Muralidhar, K.S. (2022) ‘In pursuit of balance: Vicarious liability doctrine in the United Kingdom and in India’, Hofstra Labor and Employment Law Journal, 40(2). Available at: https://ssrn.com/abstract=4303751 (Accessed: 22 March 2025)

[2] SCConline (2025) Delhi HC upholds Section 132, validates NFRA Rules, reinforces auditor accountability. Available at: https://www.scconline.com/blog/post/2025/02/08/delhi-hc-upholds-section-132-validates-nfra-rules-auditor-accountability-legal-news/ (Accessed: 22 March 2025).

[3] The Doctrine of Vicarious Liability of Auditors: Delhi High Court in Deloitte v. Union of India’, IndiaCorpLaw. Available at: IndiaCorpLaw (Accessed: 22 March 2025).

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