Reporting Authority (NFRA) was constituted with effect from 1st day
of October 2018. Central Government has constituted this body under the
provisions of section 132 of Companies Act 2013 to fulfill the following aims
in this regard:
- To set up an independent
body for regulating and assisting in the proper enforcement of legislation
concerning accounting and audit.
- To gain the confidence
of investors, public and other concerned parties in the financial reporting of
Union Cabinet approves the establishment of this regulatory body as a response to various corporate scams that take place most frequently. This body serves as a regulatory body for the auditing profession to assure that information provided in financial statements is reliable.
Composition of NFRA
NFRA shall have the duly
qualified chairperson and such other members as prescribed under the Companies
Act. Following are the terms and conditions for the members and chairperson of such
- The chairperson shall be appointed by Central Government
- NFRA shall have a maximum of 15 members other than chairperson.
- The chairperson shall be a member of ICAI, i.e. he should be a Chartered Accountant having knowledge and expertise in the subjects of accounting, auditing, company law, finance, etc.
- One member with immense expertise in accounting
- One member with knowledge in the field of auditing
- One member as a representative of the MCA of the rank Joint Secretary or above.
- One member is to be nominated by RBI as its representative who shall be the member of the RBI board.
- One representative of SEBI being the chairmen or whole-time member of SEBI, nominated by SEBI.
- One member to be nominated by Central Government who has been either:
- The retired chief justice of the high court
- Judge of the high court
for more than 5 years.
- One member to be the
president of ICAI.
All the members appointed for the National Financial Reporting Authority (NFRA) shall have the following qualifications:
- Every member shall be
qualified and experienced in the field of accounting, auditing, finance, etc.
- Members shall give the
declaration to the Central Government about no conflict of interest also they
fulfill the criteria of independence for their appointment.
- Every member and
chairperson shall not be connected with any audit office during the tenure of
their term in office or 2 years thereafter.
Role & Responsibilities of NFRA
Before setting up the
NFRA, the Central Government used to set the accounting policies upon the
recommendations of ICAI. ICAI along with the recommendations and suggestions
from National Advisory Committee prescribe the accounting standards. With the
establishment of NFRA, ICAI takes the recommendation of such a regulatory body for
the formulation of accounting and auditing standards therefore, NFRA replaced
National Advisory Committee. Further, it was established by the Central
Government to take up the following additional responsibilities as well:
- For recommending the
foundation of accounting policies, accounting standards and guidelines for
audit and audit policies.
- They shall monitor that
such accounting & auditing standards are duly complied with.
- NFRA oversees and
monitors the functioning and quality of work of the professionals such as
auditors, CFOs, etc and even suggests the measures for improvement, if
Applicability of NFRA Rules
NFRA along with its
other stated roles and responsibilities has the additional powers to
investigate the affairs and working of companies as well body corporate or even
persons who are the members of ICAI (Audit Firm or Auditors).
NFRA can conduct quality
reviews of the following class of companies:
- Listed Companies
operating in India.
- Unlisted Companies whose
- Net Worth exceeds INR
- Paid-Up Capital exceeds
INR 500 Crore;
- Annual Turnover exceeds
INR 1000 Crore.
- Companies with shares
National Financial Reporting Authority (NFRA) reviews the functioning of Auditors/Audit Firm who has conducted the audit of the following class of companies:
- Has conducted the audit
for more than 200 companies in a year
- Has conducted an audit
of more than 20 Listed Companies.
- Has conducted the audit
of the following companies irrespective of they are listed or unlisted:
- Companies having Net
Worth of more than INR 500 Crore, or
- Companies having Paid-Up
Capital of more than INR 500 Crore, or
- Companies having a
turnover of more than INR 1000 Crore.
- A company whose shares
are listed outside India.
Note: Above restrictions need not have adhered in case the NFRA deems fit the investigation or inspection in public interest or it has received the orders from Central Government to conduct such investigation.
Non-Applicability of NFRA Rules
Scope of NFRA doesn’t
apply to the following class of companies:
- Private Companies
- Limited Liability
- Unlisted Public
- Net Worth is less than
INR 500 Crore;
- Paid-Up Capital is less
than INR 500 Crore;
- Annual Turnover is less
than INR 1000 Crore.
Powers of NFRA
NFRA has the following
powers as conferred upon it by Central Government:
- To investigate into the affairs of Auditors or Audit firms in case of any misconduct. Provided that, no other authority can initiate the proceedings against such CA or CA firms where NFRA has initiated its proceeding.
- National Financial Reporting Authority (NFRA) can initiate the proceeding on its own or upon the reference made by the Central government.
- NFRA shall have the same powers as are vested in the hands of Civil Court under CrPC (Criminal Procedure Code 1908) such as:
- To produce the books of accounts and other documents at such place and time as specified by NFRA.
- To summon and enforce the attendance of any person
- Examining under oath.
- To issue a commission for the examination of witnesses or documents.
- In case any person is found guilty of any fraud or misconduct, NFRA has the power to impose the following penalty:
- In the case of Individual auditor: INR 100000 up to the 5 times of receipt of fees.
- In the case of Audit firms: INR 500000 up to 10 times of fees charged.
- To debar or suspend from practicing as an ICAI member for a period of 6 months to 10 years.
- Any aggrieved person not satisfied with the NFRA order can appeal to the Appellate Authority.
From the above discussion, we can conclude that the role of ICAI has been significantly diluted to the extent that it will continue its role of supervising the audit of private companies and unlisted public companies. However, ICAI will also continue with its advisory role of recommending the audit and accounting standards and policies to the Central Government.
However, as per the sources, the debates concerning the issue was discussed with the public in general and got the reviews in favor of ICAI. The government is continuously defining the terms and conditions of the NFRA to include secretarial audit, cost audit, including other professionals such as Company Secretaries in practice and cost accountant within its ambit of scope. Thus there will be a greater reform in the corporate sector to see the emergence of NFRA as a single regulatory body for different professionals.