Recently, The Union Cabinet approved setting up of the National Financial Reporting Authority ('NFRA'), which will be an independent regulator for the auditing professionals. Ministry of Corporate Affairs ('MCA') vide notification dated March 21, 2018 notified subsection (3) and (11) of section 132 of the Companies Act, 2013 ('CA 2013'). Section 132 of the CA 2013 deals with the constitution of National Financial Reporting Authority ('NFRA') and subsection 3 of the said section deals with constitution of the NFRA and subsection 11 deals with the power of central government to appoint secretary and other employee in NFRA and decide the terms and conditions of the appointed employees. MCA has also notified NFRA (Manner of appointment and other terms and conditions of service of Chairperson and Members) Rules, 2018.
These sub-sections have been notified at a time when the incidence of financial frauds committed with the help of professionals are coming into the picture one after another. NFRA is expected to play a bigger role in curbing the involvement of the professional in financial frauds or cases of professional misconduct.
WHAT IS NATIONAL FINANCIAL REPORTING AUTHORITY ('NFRA'):
The idea for an NFRA came after the Satyam scam in 2009, following which the Standing Committee on Finance recommended the creation of an audit regulator. Later in CA, 2013 section 132 (1) authorized the Central Government to constitute a National Financial Reporting Authority to provide for matters relating to accounting and auditing standards. The role of NFRA is:
- To make recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or class of companies or their auditors, as the case may be;
- To monitor and enforce the compliance with accounting and auditing standard;
- To oversee the quality of service of the professionals associated with ensuring compliance with accounting and auditing standard;
- To suggest measures required for improvement in the quality of service of the professionals;
National Financial Reporting Authority (NFRA) is a body proposed in CA 2013 for the establishment and enforcement of accounting and auditing standards and it would oversee the services and quality of services provided by the auditors and mainly listed companies and large unlisted public companies (threshold yet to be decided) will fall under the jurisdiction of NFRA. It will be an audit watchdog and a regulator for the Government.
POWERS OF NFRA:
Apart from making recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards, the NFRA will have the investigative and disciplinary powers. NFRA can:
1. investigate either suo moto or on the reference made to it by Central Govt. into the matters of professional or other misconduct, committed by any member or firm of chartered accountants, registered under the Chartered Accountants Act, 1949.
2. impose penalties of not less than 1 lakh which may extend to five times of the fees received, in case of individuals professionals and of not less than 10 lakhs which may extend to ten times of the fees received, in case of professional firms; IF the misconduct is proved.
3. debarring the member or the firm from engaging himself or itself from practice as the member of the Institute of Chartered Accountant of India for a minimum period of six months which may extend to a period of 10 years.
4. NFRA has been vested with the same powers as are vested in civil courts under the Code of Civil Procedure, 1908 while trying a suit, relating to:
- discovery and production of books of account and other documents, as may be specified by the National Financial Reporting Authority;
- summoning, enforcing the attendance of persons and examination them on oath;
- issuing commissions for the examination of witnesses or documents;
- inspection of any books, registers and other documents of any person to whom NFRA has summoned, enforced the attendance and examined on oath;
It is also being provided in section 132 of CA 2013 that no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the NFRA has initiated an investigation under this section.
However, any person aggrieved by any order of the NFRA may appeal before the Appellate Authority constituted for this purpose.
COMPOSITION OF NFRA:
NFRA shall consist of the following:
- a Chairperson
- three full-time members
- nine part-time members
The number of members including full time and part time members will not exceed 15. The Central Govt. has right to appoint the chairman and other members of NFRA on the recommendation of the search-cum-selection committee.
Chairperson and full time members of NFRA shall not be associated with any audit firm (including related consultancy firms) during the course of their appointment and two years after ceasing to hold such appointment and will give a declaration to the Central Govt. regarding no conflict of interest or lack of independence in respect of their appointment to the NFRA.
Central Govt. may also appoint a secretary and such other employees as it may consider necessary for the efficient performance of the functions by NFRA.
NFRA (Manner of appointment and other terms and conditions of service of Chairperson and Members) Rules, 2018 covers detailed provisions regarding the composition of NFRA and the terms and conditions of the appointment of the Chairperson and members of NFRA.
ROLE OF INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA ('ICAI') AFTER FORMATION OF NFRA:
ICAI would continue to play its advisory role with respect to accounting and auditing standards and policies by making its recommendations to the Central Govt. As listed companies and large unlisted companies will fall under the jurisdiction of NFRA, the audit of private companies and unlisted companies (below threshold limit) will be under ICAI.
ARE ONLY CHARTERED ACCOUNTANTS COVERED BY NFRA:
If we read section 132 of the CA 2013, the major focus has been kept on the services provided by the member or the firm who are engaged in practice as the member of the Institute of Chartered Accountant of India (ICAI). The provisions of section 132 of CA 2013 use the terms ‘audit’, ‘accounting standards’ and ‘professions associated with ensuring compliance with such standards’, which are not defined anywhere as of now and by simple interpretation covers statutory audit. Though Government in future may define these terms and may increase the scope of these terms by including secretarial audit, cost audit, which will result in other professionals like Company Secretaries and Cost Accountants falling under the ambit of NFRA. It will be interesting to see how NFRA emerge as a single regulator for different professions and what will the role of the existing regulators of these professions in the future.
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