What is NFRA?
National Financial Reporting Authority (NFRA) is a single independent authority proposed in Companies Act, 2013 for the establishment and enforcement of accounting and auditing standards and oversight of the work of auditors.
Why the Need for NFRA?
- Restructuring or introducing new regulating authorities across the globe has been carried out in response to financial scams owing to the feeble regime of corporate governance and weak disclosure requirements in accounting and auditing. In India, the idea of floating the NFRA came about in the aftermath of the Satyam scam and its need was further highlighted after witnessing the more recent episodes involving Nirav Modi.
- The non-performing assets (NPA) situation arose since last decade put the question mark of auditors and auditing standards. Although banks are subject to different kinds of Audit yet NPAs are at increasing at alarming levels.
- Tax evasion has played major roles in bringing the NFRA into existence.
- Most of the major economies of the world have independent audit regulators and therefore, India also needs to match up with them as well.
- Current regulator of auditors and auditing firms i.e ICAI had liberal approach against auditors involves in malpractices in past and this can be very well known to PM (He mentioned alongwith figures in his speech in CA day program in 2017)
Which Companies will be covered by NFRA?
The NFRA shall have power to monitor and enforce compliance with accounting standards, auditing standards, oversee the quality of service and undertake investigation of the auditors of the following class of companies and bodies corporate, namely:
- Companies whose securities are listed on any stock exchange in India or outside lndia;
- Unlisted Public Companies having
- Paid up Capital is Rs. 500 CR or More; OR
- Turnover is Rs. 1000 CR or More; OR
- Aggregate of Outstanding Loans, Debentures and Deposit is Rs. 500 CR or More in immediately preceding F.Y.
- Insurance companies, Banking companies, Companies engaged in the generation of supply of electricity;
- Companies governed by any special Act like
- Reserve Bank of India under Reserve Bank of India Act, 1934;
- State Bank of India under State Bank of India Act, 1955;
- Life Insurance Corporation of India under incorporated under Life Insurance Corporation Act, 1956;
- Unit Trust of India under The Unit Trust of India Act, 1963;
- Associate/subsidiary of the aforesaid company/body corporate incorporated outside India, income/net worth of which is more than 20% of the consolidated income/net worth of the aforesaid company/body corporate.
- Any Company, Body Corporate or Person referred to NFRA by the Central Government;
Once a Company/Body Corporate covers under the NFRA Rules, will be covered by NFRA for 3 more years such Company/Body Corporate falls outside NFRA Rules in later stage.
Filing of NFRA-1
Accordingly, while three kinds of class of entities will be regulated by NFRA viz "companies", "body corporates" and "persons", however, only "body corporates" of such regulated entities will be required to do filing of NFRA-1 once within 30 days from the commencement of the Rules i.e within 13.12.2018; and thereafter within 15 days of appointment of the auditor.
Exemption from NFRA-1
- Companies Covered under NFRA rules (Because they had already filled ADT-1)
- Private company or any other company which is not regulated by NFRA. (Because they are completely exempt from NFRA rules)
There is no logic of filing NFRA-1 by all companies appointing auditor because they will have to anyway file e-Form ADT-1 informing the details about the auditor.
Functions and Duties of NFRA
- Maintain details of particulars of auditors appointed in the companies and bodies corporate specified in rule 3;
- Recommend accounting standards and auditing standards for approval by the Central Government;
- Monitor and enforce compliance with accounting standards and auditing standards;
- Oversee the quality of service of the professions associated with ensuring compliance with such standards and suggest measures for improvement in the quality of service;
- Promote awareness in relation to the compliance of accounting standards and auditing standards;
- Co-operate with national and international organizations of independent audit regulators in establishing and overseeing adherence to accounting standards and auditing standards; and
- Perform such other functions and duties as may be necessary or incidental to the aforesaid functions and duties.
Annual return by Auditor
Every auditor covered under NFRA rules shall file a return with the NFRA on or before 30th April every year in such form as may be specified by the Central Government.
Role of ICAI
ICAI can give recommendations to NFRA on proposals for new accounting standards or auditing standards or for amendments to existing accounting standards or auditing standards on being asked and such recommendations are not binding to NFRA.
Still, Proprietorship concerns, Firms, LLPs, Charitable Trust, AOP/BOI, Societies, etc. along with Private Companies and Unlisted Public Companies which are not covered under rules would still be governed by ICAI and ICAI would have the sole discretionary power to provide rules and regulation for them.
Success of NFRA would depend upon the bureaucracy consist in it and powers vested in it otherwise it would be simply just transfer of the power from one authority to the other. Only time will tell whether NFRA will become a powerful independent body or just remain government department like SFIO.
Tags Corporate Law