National Financial Reporting Authority is constituted under the provisions of Section 132 of the Companies Act, 2013. The constitution of the authority is effective from October 1, 2018. The need for this authority arose after various scams like PNB and various financial scams. In this article, we shall look at its composition, powers and jurisdiction.
Objective of constituting National Financial Reporting Authority
The main objective behind its constitution includes:
- Setting up a separate and independent regulatory body that helps in framing and enforcing legislation relating to accounting and auditing;
- Improving investor’s confidence and public confidence in the financial reporting of an entity.
What is the Composition of this Authority (NFRA)?
As per the Companies Act, NFRA should have a chairperson who is appointed by the Central Government and a maximum of 15 members. This appointment is subject to the following qualifications:
- Such person should have an expertise in accountancy, auditing, finance or law;
- They should make a declaration to the Central Government about no conflict of interest or lack of independence in their appointment;
- All the members (including Chairperson) who are in full time employment must not be associated with an audit firm during their term of office and 2 years post their term.
The draft NFRA rules provides for the following composition of this authority:
- Chairperson is a CA and a person of eminence possessing expertise in accountancy, auditing, finance or law;
- Member- Accounting;
- Member- Auditing;
- Member- Enforcement;
- One representative from the MCA not below the rank of Joint Secretary or equivalent;
- One Representative of Reserve bank being a member of its board to be nominated by the RBI;
- One representative of the SEBI, being the Chairman of SEBI or a whole time member of SEBI to be nominated by SEBI;
- A retired CJI of High Court or a person who has been a judge of a high court for more than 5 years time to be nominated by the Central Government;
- President of the ICAI.
It is worth mentioning here that the chairman can invite any other person to the meeting to provide their expert opinion.
Role of the National Financial Reporting Authority (NFRA)
This authority has the following responsibilities:
- To make recommendations on the foundation and laying down accounting and auditing policies and standards;
- To monitor and enforce compliance of the accounting standards as well as auditing standards;
- To oversee the service quality of professionals and suggest measures for improvement in the quality of the service;
- Perform other functions related to the above.
Before this authority was constituted, the Central Government prescribed the accounting standards on the recommendations of the ICAI. The ICAI would prescribe it after consulting the National Advisory Committee on Accounting Standards, who shall provide their recommendations. Now the ICAI will have to consult the NFRA and examine its recommendations. Therefore the National Advisory Committee on Accounting Standards is replaced by the NFRA.
What are the powers of National Financial Reporting Authority (NFRA)?
After discussing its role, now let’s discuss its powers. It has the following powers:
- Power to investigate matters of professional or other misconduct committed by a prescribed class of Chattered Accountant firms or CAs. No other authority shall initiate or continue proceedings where this authority initiates an investigation. Such an investigation may be commenced either suo moto or on a reference made by the Central Government.
- Same powers as a civil court under the CrPc, in respect of a suit involving the matters provided below:
- Discovery & production of the books of account and other documents at a place and time as mentioned by the NFRA;
- Summoning & enforcing the attendance of persons and examining them under oath;
- Inspection of books, registers and other documents of any person at any place;
- Issuing commissions for examining witnesses or documents.
- If a professional or such other misconduct is proved, then it shall have the power to impose penalties as well-
- For individuals- A fine between 1 lakh rupees to 5 times the fee received;
- For firms- A fine between 5 lakh rupees to 10 times the fee received.
- Debarring the member or firm from practice as a member of ICAI between 6 months to 10 years period.
In case a person is not satisfied with the order of the National Financial Reporting Authority, such person can make an appeal to the Appellate Authority.
What are the potential benefits of NFRA?
- India gains the eligibility for the International Forum of Independent Audit Regulators, which was earlier denied, thus resulting in increasing the confidence of foreign/domestic investors;
- Increase in foreign/domestic investors;
- Economic growth;
- Development of the auditing profession;
- The Constitution of NFRA frees the resources for the ICAI to work on developing new and complex skill required in the world of technology.
Jurisdiction of National Financial Reporting Authority
Jurisdiction of National Financial Reporting Authority for Investigation of CA and their firms under Section 132 would extend to the listed companies and large unlisted public companies. The Central Government may also refer such other entities to investigate where the public interest is involved.
The inherent regulatory role of the ICAI in the Chartered Accountant Act shall continue in respect of its members in general and with respect to audits relating to private limited companies and public unlisted companies below the threshold limit.
The quality review board shall continue quality audit in respect of private limited companies, public unlisted companies lower than the threshold prescribed and also with respect to the audit of companies that may be delegated to the quality review board by the NFRA. Additionally, ICAI shall continue with its advisory role with respect to accounting and auditing standards and policies by giving its recommendations to the NFRA.
ICAI shall continue to have its regulatory powers in specified terms, and the quality review board shall also continue its service. The National Financial Reporting Authority will assist in framing and enforcing legislation relating to accounting and auditing. However, ICAI had some reservations against NFRA as the constitution of NFRA would create two regulatory bodies governing the same audit profession. This may cause duplication of efforts and added huge costs.
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