The faculty member probably got nuked from orbit, sponsoring orgs would be horrified to learn that a PI (principal investigator) they funded had misrepresented their credentials that badly.

It depends on the country.

Here it is required for certain levels of "quality education to students" whereas those with lower tiers certainly are allowed to teach some units, especially lectures. But they're not curating or a primary teacher in courses. If these aren't met, your official recognition as a university is gone. It's regulation protecting the quality of education in the nation.

Obviously research it's entirely up to whoever's putting the grant up. But most research journals these days are regulated by the academia version of a HoA, and such incidents as I mentioned are very dramatic.

Edit: Personally, I don't agree with it and think it's an archaic culture that holds back progressive and brilliant ideas. But it balances out in that a university can recognise an equivalent status. Any university or country that respects that system will recognise an "under qualified" person breaking such ground when an entire institute vouches for them. But that view isn't shared around the world.

My personal opinion/experiences are that those that are the worst in their field are the ones that clutch onto their degrees the most and will think lowly of a mind that hasn't amassed as much documentation; being officially recognised is more important than your hypothesis.

I certainly lean a certain way in my thinking, but it's only because I believe the core of academia is meant to be for the advancement of knowledge and ideas. In modern academia, this no longer occurs as effectively as it once did, therefore it is failing at its core purpose. More and more younger generations are determining it's not as valuable as it once was and are so far successfully proving that to be true.