“Union Cabinet has now approved
the proposal for establishing the National Financial Reporting Authority
(NFRA), intended to serve as an independent regulator for the auditing
We believe establishment of NFRA
as an independent regulator for the auditing profession will improve the
transparency and reliability of financial information presented by listed and
unlisted companies in India. ”
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 will fall under the jurisdiction
of NFRA. It will be an audit watchdog and a regulator for the Government.
Government of India has recently
set up the National Financial Reporting Authority ('NFRA'), which will be an
independent regulator for the audit professionals. Section 132 of the CA 2013
deals with the constitution of 'NFRA' and power of central government to
appoint Chair person, member, secretary and other staff at NFRA. 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 auditors are coming out in the open. NFRA is expected to play a bigger
role in curbing the involvement of the professional in financial frauds or
cases of professional misconduct.
“NFRA is the authority
proposed to serve as an independent regulator for the auditing profession and
to investigate professional matters or misconduct of any member or a firm of
WHAT IS NATIONAL FINANCIAL
REPORTING AUTHORITY ('NFRA'):
The idea for NFRA came after the
Satyam scam in 2009, following which the Standing Committee on Finance
recommended the creation of an audit regulator. Later 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 rules for 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
– To suggest measures required for improvement in
the quality of service of the professionals;
comprise of a chairperson, three full-time members and a secretary. 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.
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.
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
be ICAI’s role now?
The role of
ICAI stands significantly diluted. ICAI’s role will continue in respect of its
members, in general, and, specifically, with respect to audits pertaining to
private limited companies and public unlisted companies below the threshold
limit to be notified in the rules.
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.
In a way, it
indicates a certain lack of trust in ICAI to effectively address malpractices
indulged in by recalcitrant members.
How does the
community view it?
accountants are watch-dogs, and not blood-hounds,’ goes an argument. Things
turn bad when entries are not recorded at all. In such instances, CAs can do
very little, it is argued.
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:
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.
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.
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:
and production of books of account and other documents, as may be specified by
the National Financial Reporting Authority;
enforcing the attendance of persons and examination them on oath;
commissions for the examination of witnesses or documents;
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.
person aggrieved by any order of the NFRA may appeal before the Appellate
Authority constituted for this purpose.
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 members 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. 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 emerges
as a single regulator for different professions and what will the role of the
existing regulators of these professions in the future.
For more detail:
Acquisory News Chronicle - March 2018