NFRA and Analysis of its Provisions

To improve audit quality and ensure greater transparency, the central government established a body called the “National Financial Reporting Authority” in 2013 under Section 132(1) of the Companies Act to handle matters related to accounting and auditing standards under the Companies Act 2013. The National Financial Reporting Authority shall exercise its functions through such divisions as may be prescribed. In this article, we will be concerned about the NFRA and Analysis of its Provisions, Advantages, Composition, Role, & Powers of NFRA.

What is NFRA?

The National Financial Reporting Authority (NFRA) is a body established under the provisions of Section 132 of the Companies Act, 2013. The establishment of this body is effective from 1 October 2018. The objective of the Central Government in this regard is to:

• Establishment of a separate and independent regulatory body to assist in the development and enforcement of accounting and auditing legislation
• Improving investor and public confidence in the entity’s financial reporting.

The need for this authority is said to have arisen as a response to various corporate frauds in recent times.

What is the need to strengthen NFRA?

• To enable it to effectively fulfill its duties and strengthen mandates to protect public interests.
• Ensure efficiency in the independent regulatory body.

Advantages of NFRA

• India gains eligibility for IFIAR (International Forum of Independent Audit Regulators), which was earlier rejected, resulting in increased foreign/domestic investor confidence and India’s standing globally.
• Increase in foreign/domestic investors.
• Economic growth.
• IFIAR qualification demonstrates our international business standards and further supports globalization.
• Further development of the auditing profession.
• The establishment of NFRA will free up resources for ICAI to work on developing new and complex skills needed in the uncertain world of technology.

Composition of NFRA

The Companies Act requires the NFRA to have a Chairman appointed by the Central Government and a maximum of 15 members. The appointment of such chairman and members shall be subject to the following qualifications:

• They should have expertise in accounting, auditing, finance, or the law.
• They are required to declare to the central government that there is no conflict of interest in their appointment.
• All members, including the Chairman, who are employed full-time, should not be associated with any audit firm (including related consulting firms) during their term of office and for 2 years after their term of office.

The conditions regarding the appointment of the chairman and members have not yet been prescribed. However, NFRA’s draft rules outline the following composition of the authority:

• The Chairman is a Chartered Accountant and a distinguished person with experience in accounting, auditing, finance, or the law;
• Member – Accounting;
• Member – Auditing;
• Member – Enforcement;
• One MCA representative not below the level of Joint Secretary or equivalent (ex-officio)
• One representative of the RBI who is a member of the Board of Directors of the RBI is to be nominated by the RBI;
• One representative of SEBI who is the Chairman of SEBI or a Permanent Member of SEBI to be nominated by SEBI;
• A retired Chief Justice or a person who has been a High Court Judge for more than 5 years is appointed by the Central Government,
• President, ICAI (ex-officio)

The chairman can also invite any other person to the meeting to express his professional opinion.

Role of NFRA

The NFRA has the following responsibilities:

• Make recommendations on the basis and establishment of accounting and auditing principles and standards;
• Enforcing and monitoring compliance with accounting and auditing standards;
• Supervise the quality of services provided by professionals (such as auditors, CFOs, etc.) and propose measures necessary to improve the quality of services;
• Perform other functions concerning the above.

Before the establishment of this authority, the central government would prescribe accounting standards on the recommendations of the ICAI. ICAI will prescribe the same only in consultation with the National Accounting Standards Advisory Committee which will give its recommendations. ICAI will now have to consult NFRA and review its recommendations in this regard. The National Accounting Standards Advisory Board is thus effectively replaced by the NFRA.

Powers of NFRA

The NFRA has the following powers:

• Investigate matters of professional or other misconduct committed by a prescribed class of CA firms or CAs. No other authority can initiate or continue proceedings once the NFRA has initiated an investigation. Such an inquiry can be initiated either suo moto (on its own) or on the recommendation of the Central Government.
• Same powers as a Civil Court under the Code of Criminal Procedure, 1908, in respect of a suit relating to the following matters.
  • Finding and producing books of accounts and other documents at such place and time as NFRA may determine
  • Summoning and enforcing the attendance of persons and ascertaining them under oath
  • Inspection of any books, registers, and other documents of any person in any place
  • For the examination of witnesses or documents, the issuance of a commission is required.

If professional or other misconduct is proven, he has the power to impose the following penalty:

• For individuals, a fine between Rs. 1, 00, 000 to 5 times the fees received;
• For companies fine between Rs. 5, 00, 000 to 10 times the fees received;

Exclusion of the member/firm from practice as a member of ICAI for a period of 6 months to 10 years as may be decided

Any person who is not satisfied with the order of NFRA can then appeal to the Appellate Authority.

Jurisdiction of the National Financial Reporting Authority

The NFRA’s authority to investigate chartered accountants and their firms would extend to listed companies and large unlisted public companies. Thresholds for large unlisted public companies under the jurisdiction of NFRA will be prescribed in the rules. Apart from listed companies and large unlisted public companies, the central government can also refer any other entities for investigation where public interest would be involved.

• Exception for private and unlisted companies: The regulatory role of ICAI as laid down in the Chartered Accountants Act of 1949 will continue to audits relating to private limited companies and public unlisted companies below the threshold limit.
• Quality Review Board (QRB): The Quality Review Board (QRB) will also continue to conduct quality audits in respect of private limited companies, public unlisted companies below the prescribed threshold, and also the audit of those companies that may be delegated to NFRA’s QRB.

Final words

Hence, it can be concluded that ICAI will continue to retain its regulatory powers in respect of private companies and unlisted public companies below the threshold prescribed above. The Quality Control Board will also continue to conduct quality audits in respect of private limited companies, unlisted public companies, and other audits of companies that NFRA delegates.