This article is written by Mr Ravi Karan Kakkar, a sales and finance strategist who has a rich experience of working in India, Singapore, Saudi Arabia, and Indonesia. Ravi is currently on an assignment in Jakarta, Indonesia, and is pursuing Diploma in Companies Act, Corporate Governance and SEBI Regulations with LawSikho.com.

Introduction

NFRA rules notified ICAI wings clipped – Read the headlines of newspapers when the Indian government notified about independent regulator of auditors. Prima facie, it seemed that ICAI role as a supervisory authority for auditors was weakened due to the formation of NFRA. However, the same is not true that can be testified upon an exhaustive review of the NFRA policies.

The decision to constitute NFRA was taken after the auditor’s role came under the scanner during famous multi-crore banking fraud at Punjab National Bank. In a layman language, National Financial Reporting Authority is a legal watchdog of the auditing profession. While ICAI was mandated to keep an eye on erring auditors, however, it made sense for the government to empower themselves with this responsibility.

ICAI is dead?

The market is differentiated in their opinion on this move by the central government to constitute NFRA. While already the auditing profession is regulated by various regulatory bodies such as ICAI, SEBI, and MCA; it was evident that adding another layer of a regulatory body which is superseding all other regulators would create ripples in the industry. Formation of NFRA leads to nationwide protests by members of ICAI who were of the opinion that government is trying to strip off their administrative powers leaving them with no other option but to only be a coaching institute. There is no doubt that an unprecedented power has been given to NFRA that has established their supremacy over any other laws. However, in a wider scheme of things, it may seem logical as it may lead to an efficient bifurcation of work between ICAI and NFRA.

What is the rationale behind the formation of NFRA?

Any government in power is responsible for anything & everything happening in the country.  People started blaming the government for not being able to regulate the banking sector scams. When you are being blamed for something, it is imperative that you should have complete control over the sector. In this case, the power to regulate the sector was delegated in the able hands of ICAI. However, due to the magnitude of corporate frauds, it was sensible on part of the government to vest control in their hands. That in no way supersedes the efficacy of ICAI, but in a broader perspective, it will enhance the veracity of auditing profession which is the sole purpose of ICAI as well as NFRA.

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NFRA has the power to monitor and enforce compliance with accounting and auditing standards, oversee the quality of service under sub-section 2 of sec 132 of the companies act 2013, and investigate under sub-section 4 of sec 132 of the companies act 2013 for-

• all the listed companies (whose securities are listed on any stock exchange within India or abroad).

• Unlisted public companies with paid-up capital >= INR 500 Cr or annual turnover <= INR 1000 Cr or total outstanding loans, debentures, deposits <= INR 500 Cr in preceding financial year,

• Insurance companies, banking companies, electricity generation/supply companies, companies formed under the special act,

• Any company referred by the central government,

• The associate/Subsidiary company whose income/net-worth exceeds 20% of consolidated income/net-worth of a company which falls under above 4 points.

Basic details about NFRA

NFRA Formation Committee

• NFRA shall consist of the chairperson to be appointed by the central government with experience of not less than 25 years in accountancy, auditing, finance or law.
• Three full-time members to be appointed by the central government with experience of not less than 20 years in accountancy, auditing, finance or law.
• Nine part-time members to be appointed by the central government. Part-time members should be representatives from MCA, CAG, RBI, SEBI, ICAI.
• The total number of members in a committee should not exceed 15 including part-time and full-time members.

DISCLAIMER: All the members should make a declaration to the central government in a prescribed format stating there is no conflict of interest in their appointment.

Full-time members should not hold any position in any audit or consultancy firm during the course of their engagement and 2 years henceforth after leaving NFRA.

Functions of NFRA

• Recommending auditing and accounting policies and standards to the central government.
• Ensuring compliance with regards to auditing and accounting standards.
• Overseeing the quality of service of the professionals
• Power to investigate any corporates and individuals registered as members under the Chartered Accountants Act 1949.
• Code of civil procedure, 1908 will apply in matters such as asking the firm/individual to produce books of account, registers, any other documents; summoning of persons; issuing commissions for the examination of witnesses/documents.

Penalties/ Punishment

• If an auditor is proven guilty of a misconduct by NFRA, then under section 132 of the companies act 2013 NFRA has the power to impose fine of minimum INR 1 lakh up to 5 times of fees received in case of individuals/and INR 10 lakh up to 10 times of fees received in case of firms.
• The auditor (if proven guilty) registered as a member under chartered accountants act 1949 can be suspended for a period of 6 months or up to a max of 10 years as per the ruling of NFRA.
• Further as per companies rules (The National Financial Reporting Authority Rules 2018) – In case of non – compliance, any officer/company/auditor in default shall be punished as per sec 450 of the companies act 2013.

Provision to Appeal

• An aggrieved person can appeal to appellate authority against the order passed by NFRA.
• The appellate authority shall consist of a chairperson and 2 other members to be appointed by the central government.

Compliance requirements for NFRA and Appellate Authority

• The officer authorized by the appellate authority shall submit an annual report to the central government giving a full account of its activities in the financial year.
• Appellate authority to follow prescribed rules with regards to qualifications for appointing chairperson & members of the appellate authority, manner of selection, T&C of their service and requirement of support staff.
• NFRA shall submit an annual report to the central government giving a full account of its activities in the financial year.
• Central Government may appoint secretary and employees in NFRA.
• Head office of NFRA shall be at New Delhi. NFRA to maintain books of accounts and other books in such manner as Central Government & CAG prescribe.
• NFRA accounts to be audited by CAG.

Disclosures

• As per NFRA Rules (2018) issued by MCA – body corporates governed by the rules shall disclose details about their auditor in Form – NFRA 1within 30 days of commencement of rules.
• Body corporate shall inform the authority about the appointment of auditor in Form NFRA-1 within 15 days of his/her appointment.
• Eligible auditors as per rule 3 of the NFRA rules 2018 shall file a return with the authority on or before 30th April every year.

Conclusion  

Committee formed by the honourable Supreme Court of India to strengthen the audit regulatory process recommend the formation of National Financial Reporting Authority. However, among many rules laid down by the committee, the cabinet did not pass the network liability in the rules. Committee recommended monetary penalties on an international network with which Indian audit firm is a party to.  The power given to NFRA to question not only defaulting individual auditors but also audit firms is a step in the right direction which was missing in Chartered Accountants Act, 1949.

Audit firms are bound to disclose the names of defaulting partner/s, failure to disclose the same will result in by default action on all the partners and employees of the audit firm. Thus employees of the audit firms are also under the scanner of NFRA, therefore there should be a greater sense of ownership and awareness among the employees now. The clause that any company referred to NFRA by the central government can be monitored and investigated brings practically all the private companies, body corporates, and various unlisted public companies under the umbrella. Probably next in line would be the implementation of a structure that enables auditors of parent companies to vet/approve the audits of subsidiary and associate companies. This will enhance the effort to bring overall transparency in the auditing process. How effective this entire exercise would turn out to be is still a question to be answered, however it is certain that the government has taken initiatives as per best practices followed in the international arena. Also, the authority is allowed to be a member of international associations of independent audit regulators thereby providing them with the freedom to take assistance from regulators based out of India during the investigation process of any auditor in India. The idea is to align Indian audit practices to best standards and simultaneously work on improving the quality of service by forging strong relationships with international organizations.

The authority can also take steps such as workshops, seminars, conferences with an endeavor to aware auditors about best accounting and audit standards. Monitoring/Ensuring Compliance/ Improvement of quality of service are three pillars of NFRA that would potentially lay a strong foundation for the Indian audit industry in near future.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.