The Union Cabinet approved establishment of National Financial Reporting Authority (NFRA) as an independent regulator for the auditing profession. It aims to tighten regulatory oversight over auditors and plug loopholes. It will be independent from those it regulates for enforcement of auditing standards and ensuring quality of audits.
Setting up NFRA was one of the key changes brought about by the Companies Work 2013 but its provisions were not notified for the last five years. However, the recent failure of auditors to spot the Rs12,636 crore PNB fraud, allegedly perpetrated by the group firms of Nirav Modi and Mehul Choksi, seems to have prompted the government to approve the proposal.
NFRA will have powers to investigate chartered accountants and their companies of all listed companies and large unlisted public companies, fund minister Arun Jaitley said in a press briefing after a cabinet meeting, adding the thresholds for unlisted companies will be prescribed in the rules that will be notified shortly. Further, NFRA will also investigate instances referred to it by the central federal government, Jaitley said.
The cabinet approved the creation of one post of chairperson, three posts of full-time members and one post of secretary for NFRA.
The government said the inherent regulatory role of the Institute of Chartered Accountants of India (ICAI) 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.” Further, ICAI shall continue to play its advisory role regarding accounting and auditing standards and policies by making its recommendations to NFRA.
The need for establishing NFRA has arisen in the wake of accounting scams, to determine independent regulators, independent from those it regulates, for enforcement of auditing standards and ensuring the quality of audits to strengthen the independence of audit firms, the government said.
“The decision is expected to result in improved foreign/home investments, enhancement of economic growth, supporting the globalization of business by meeting international practices, and assist in further development of audit profession,” the statement added.
NFRA will have the power to research not only chartered accountants who audited a firm but also firms of chartered accountants and can impose a penalty of up to five times the fee received in case of misconduct by individuals and ten times the fees received in case there is firms. It can also debar an auditor for up to ten years.
The decision aims at establishment of NFRA as an unbiased regulator for the auditing profession which is one of the main element changes brought in by the Companies Act, 2013. The inclusion of the provision in the Act was on the specific suggestions of the Position Committee on Fund .
Impact and Jurisdiction of NFRA
Your choice is likely to lead to improved foreign/local investments, enhancement of financial growth, supporting the globalization of business by meeting international practices, and help out with further development of audit profession.
The jurisdiction of NFRA for investigation of Chartered Accountants and their companies under section 132 of the Act would extend to listed companies and large unlisted public companies, the thresholds for which shall be recommended in the Rules. The Central Federal government can also refer such other entities for investigation where open public interest would be involved.
The inherent regulatory role of ICAI as provided for in the Chartered Accountants Act, 1949 shall continue according of its members generally and specifically with respect to audits regarding private limited companies, and public unlisted companies below the threshold limit to be notified in the guidelines.
The Quality Review Board (QRB) will also continue quality audit in respect of private small companies, public unlisted companies below prescribed threshold and also regarding audit of those companies that may be delegated to QRB by NFRA. Further, ICAI shall continue steadily to play its advisory role with respect to accounting and auditing requirements and policies by causing its recommendations to NFRA.
National Financial Reporting Authority (NFRA) is a body proposed in Companies Act 2013 for the establishment and enforcement of accounting and auditing standards and oversight of the work of auditors.
The necessity for establishing NFRA has arisen on account of the need felt across various jurisdictions in the world, in the wake of accounting scams, to establish independent regulators, independent from those it regulates, for enforcement of auditing standards and ensuring the grade of audits to fortify the independence of audit firms, quality of audits and, therefore, enhance investor and public confidence in financial disclosures of companies.