On 1ST March 2018 Union Cabinet approved the establishment and functioning of National Financial Reporting Authority (NFRA)1, followed by approval by capital market regulator Securities Exchange Board of India (SEBI).
Ministry of Corporate Affairs (MCA) through its notification dated 21st March 2018, approved the establishment and functioning of National Financial Reporting Authority (NFRA) under section 132 of Companies Act 2013.2 The Authority functioning will be governed by National Financial Reporting Authority (Manner of Appointment and other terms and conditions of service of chairperson and members) Rules 20183.
The purpose behind constitution of NFRA is to enhance institutional oversight over auditors and to improve market integrity, transparency and protection of the interest of investors and other stakeholders like banks, lending institutions, suppliers, etc.
NEED FOR NFRA
In the US, failure of ENRON resulted in the introduction of stringent self-regulations by the U.S accounting and auditing profession in 2002, which lead to the need and introduction of the Sarbanes-Oxley Act 2002 that ushered in new corporate governance and disclosure requirements by corporate entities.
In India, the exposure of Satyam Scam resulted in floating the same idea, which was to have an authority to protect the interest of investors and provide true and fair view of financial statements of companies. Further the recent financial scams and defaults on account of debt of big market players ignited the need for such Authority.
Moreover 132 listed companies were put under Additional Surveillance Measure List whose scrips were suspended by SEBI for abnormal price rise, not supported by the fundamentals of the companies. Thus reiterating the need for an independent audit regulator.
Section 132 of Companies Act 20134 provides that National Financial Reporting Authority (NFRA) shall be responsible for
- Making recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or class of companies or their auditors, as the case may be;
- Monitor and enforce the compliance with accounting standards and auditing standards in such manner as may be prescribed;
- Oversee the quality of service of the professions associated with ensuring compliance with such standards, and suggest measures required for improvement in quality of service and such other related matters as may be prescribed; and
- Have the power to investigate, either suo motu or on a reference made to it by the Central Government, for specified class of bodies corporate or persons, into the matters of professional or other misconduct committed by any member or firm of Chartered accountants.
COMPOSITION OF AUTHORITY
Section 132 of CA 2013 read along with National Financial Reporting Authority (Manner of Appointment and other terms and conditions of service of chairperson and members) Rules 2018 provide that:
The Authority shall consist of
- A Chairperson, who shall be a person of eminence and having expertise in accountancy, auditing, finance or law to be appointed by the Central Government
- Three full time members.
- Nine Part Time members5. The Authority can have a maximum of fifteen members at a time.
Section 132 of Companies Act 2013 clearly states that where professional or other misconduct is proved, the authority can pass an order for -
- Imposing penalty of -
- Not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and
- Not less than ten lakh rupees, but which may extend to ten times of the fees received, in case of firms6;
- Debarring the members or the firm from engaging himself or itself from practicing as member of the Institute of Chartered Accountant of India for a minimum period of six months or for such higher period not exceeding ten years as may be decided by Authority.
ICAI V/S MCA.7
The Institute of Chartered Accountants of India (ICAI) have expressed dissenting views over the constitution of NFRA.
ICAI in its Standing Committee Report clearly stated that constitution of NFRA will lead to-
- Multiple Regulatory Bodies: Creating NFRA would result in two regulatory bodies (ICAI and NFRA) governing the same audit profession. This would result in duplication of efforts.
- Constitution of NFRA will be a costly affair.
- Relevance of NFRA in the context of the Companies Act 2013: The objective of NFRA is to regulate audit quality and protect public interest. These are also the main objectives of ICAI which strives to be a world class regulator.
- Auditing Standards: ICAI as a world class regulator would be more aligned to market needs and NFRA regulatory provisions are yet to be examined.
- The ICAI has sufficient regulatory, supervisory, organizational and budgetary independence as regards to the audit profession.
Looking at the initial developments National Financing Regulatory Authority (NFRA) has been set up as an oversight body having quasi-judicial authority to oversee matters of professional misconduct by Auditors and Charted Accountants. It is further observed that similar oversight bodies also exist in other countries, i.e, Financial Services Authority (FSA) in United Kingdom and Public Company Accounting Oversight Board (PCAOB) in United States. However, as issues relating to conflict of mandate with regard to disciplinary matters between the NFRA and ICAI, it should not create two parallel jurisdictions governing the same issue. The NFRA should be able to function without any jurisdictional conflicts.
6. Substituted by the Companies (Amendment) Act, 2017 w.e.f. 09.02.2018 Vide Notification No. I/I/2018-CL-I Dated 09.02.2018 for INR 10 lakhs.
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