The companies act of 2013 under the section 132 provides the central government the power for constitution of National Financial Reporting Authority (NFRA). It is also known as legal watchdog for the auditing profession. It shall be an authority to provide for matters relating to accounting and auditing standards. By the power vested by the companies act, the central government on 1st October, 2018 constituted NFRA.
It is administered by the Ministry of Corporate Affairs under the Government of India. It is created with an objective to continuously improve the quality of all corporate financial reporting in India. It is believed that constitution will result in improved domestic and foreign investments, improved economic growth, assistance in the development of the audit profession and supporting the globalisation of business through compliance with international practices.
Composition of the NFRA
The National Financial Reporting Authority was created by the Government of India to strengthen the regulatory process of the audit profession. It will enforce accounting standards and supervise auditors. It's a government body whose members include listed companies, securities and subsidiaries. The authority consists of a chairperson, three full-time members and a secretary. The present chairperson is Dr. Ajay Bhushan Prasad Pandey, since 01st April 2022.
- The total number of members should not exceed fifteen. All members of the NFRA are not required to declare any conflict of interest.
- The chairman and the other full-time members must not hold a position in an audit or consultancy firm.
- The other members should not be associated with any financial firm during their engagement, but they should not hold a similar position after they depart from NFRA.
- To monitor and regulate compliance with the accounting standards, the National Financial Reporting Authority should also maintain books of accounts and other records relating to accounts.
- The Comptroller and Auditor-General of India should audit the accounts of the NFRA. The Auditor-General of India may require thorough auditing of an organisation's accounts.
- A member of the authority should be independent of the government and be subject to rigorous auditing standards. It should also have the authority to reject written objections or clarifications.
- While the ICAI initially had reservations about the NFRA, it later realised that it would help ensure that standards are consistently adhered to. And it would also help in enforcing existing accounting and auditing legislation.
- The NFRA will have jurisdiction over listed and large unlisted companies. Other entities may also be referred for investigation by the Central Government.
- Some prerequisites to becoming a member of the NFRA include paid-up capital of ?500 crores, turnover of at least ?1000 crores per annum, outstanding loans, debentures and deposits of at least ?500 crores.
Duties of NFRA
The clause (2) of Section 132 provides for the duties of the NFRA. It is provided that NFRA will;
- Recommend accounting and auditing policies and standards to be adopted by companies 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;
- Perform such other functions and duties as may be necessary or incidental to the aforesaid functions and duties.
Powers of the NFRA
The National Financial Reporting Authority is empowered by the NFRA Rules, 2018 for;
- The NFRA has the same powers as the Civil Court. It may demand the production of books of account, oaths and other documents and may examine persons under oath.
- The National Financial Reporting Authority (NFRA) has the power to investigate any misconduct involving the Chartered Accountants or CAs who are members of the prescribed class.
- It may initiate proceedings and impose significant fines on erring auditors.
- The NFRA has the authority to investigate matters of misconduct involving CAs and Chartered Accountants.
- The NFRA can impose a penalty of not less than ?1 lakh but not exceeding 5 times the fees collected. Also, the NFRA may also investigate and take action against individuals who violate the rules of professional conduct.
- It has the power to initiate investigations on its own and upon referral from the Central Government.
- It can also issue commissions to examine witnesses, and it has the power to issue debarment orders and appeals.
- The NFRA has wide powers and can suspend or bar an auditing firm or member from practising. NFRA can also take action against an audit firm or auditor if it finds that a member has not been following the rules in their work.
- The NFRA also has the power to invite other experts to perform related functions.
- It can make recommendations for changes to the ICAI's rules and regulations. This can help improve the quality of service in the accounting profession.
It has also been given the power to investigate matters of professional misconduct by chartered accountants or CA firms, impose a penalty and debar the CA or firm for up to 10 years. It is provided that no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the National Financial Reporting Authority has initiated an investigation.
After constitution of NFRA, India gained eligibility for International Forum of Independent Audit Regulators (IFIAR) which was earlier denied. It also increased foreign investors in India.