(This article was written by Partha Prateem Ray Choudhury, a graduate of Dibrugarh University, during his internship with iPleaders)
Quality of accounting and auditing plays a pivotal role in corporate governance. Under Section 210A of the Companies Act, 1956 an advisory Committee called ‘National Advisory Committee on Accounting Standards’ (NACAS) had been constituted by the Central Government to advise it on the formulation and laying down of accounting standards and auditing policies. As per the new Companies Act, 2013 NACAS will be replaced by National Financial Reporting Authority (NFRA). The National Financial Reporting Authority (NFRA) is a quasi- judicial body which regulates aspects related to accounting and auditing.
Provisions relating to NFRA under Companies Act, 2013
Section 132 of the Companies Act, 2013 (hereinafter referred to as ‘the Act’) provides for the constitution of NFRA by the Central Government to provide for matters relating to accounting and auditing.
Composition of NFRA
The NFRA shall consist of the following persons to be appointed by the Central Government, namely:-
1) A Chairperson who is an eminent person and has expertise in accounting, auditing, finance or law.
2) A maximum of 15 members comprising of
a) Member- Accounting,
b) Member- Auditing and
c) Member- Enforcement.
3) A representative of the Ministry of Corporate Affairs who is not below the rank of Joint Secretary or equivalent.
4) A representative of RBI, nominated by it and who is a member of RBI Board.
5) A representative of SEBI who is its Chairman or whole-time member and is nominated by SEBI.
6) A retired Chief Justice of a High Court or a person who had been a High Court Judge for not less than 5 years to be nominated by the central government.
7) President of the Institute of Chartered Accountants of India (ICAI).
The Chairperson and other members who are in full time employment of NFRA cannot be associated with any audit firm including related consultancy firms during the course of their employment and two years after the expiry of such appointment.
Structure of NFRA
NFRA shall consist of the following committees:-
i) Accounting Standards Committee,
ii) Auditing Standards Committee, and
iii) Enforcement Committee.
Powers and Functions of NFRA
A) NFRA may investigate either suo-motu or on a reference made by the Central Government in matters of professional misconduct committed by any member or Chartered Accountants firm.
B) To make recommendations to the Central Government on formulation and laying down of accounting standards and auditing policies for adoption by companies or their auditors.
C) To monitor and implement compliance relating to accounting standards and auditing policies as prescribed.
D) To oversee the quality of service of professions associated with compliance of accounting standards and auditing policies and suggest measures for improvement
E) NFRA shall have equivalent powers as a civil court under the Code of Civil Procedure, 1908. It can exercise the powers related to:-
i) discovery and production of books or other documents as specified by NFRA;
ii) summoning and enforcing the attendance of persons and examining them on oath;
iii) inspection of books, registers and other documents of any person;
iv) issuing commissions for examination of witness or other documents.
F) NFRA may impose penalties:
i) not less than one lakh rupees which may extend up to five times of the fees received in case of individuals and
ii) not less than ten lakh rupees which may extend up to ten times of the fees received in case of firms.
G) NFRA may consider an investigation based on monitoring and compliance review of auditor or audit firm upon recommendations by Member- Accounting and Member- Auditing.
H) NFRA shall receive a final report from the Committee on Enforcement on matters referred to them and issue a notice in writing to the investigated company or the professional on whom the action is proposed to be taken.
I) NFRA may conduct quality review of the following class of companies:-
a) Listed companies,
b) Unlisted companies having net worth or paid up capital of not less than 500 crores or annual turnover of not less than 1000 crores as on 31st March of immediately preceding financial year,
c) Companies having securities listed outside India.
J) NFRA may debar any member or a firm from engaging himself or itself from practice as a member of the Institute of Chartered Accountants of India for a minimum period of six months which may extend upto ten years on account of proved misconduct.
K) NFRA shall have the power to accept or overrule clarifications received or objections raised in writing.
L) NFRA may investigate against the auditor or audit firms which conducts-
a) audit of 200 or more companies in a year,
b) audit of 20 or more listed companies
Functions of Committee on Accounting Standards:
a) To examine matters relating to formulation and laying down accounting standards for consideration by NFRA.
b) To recommend any new standard to ICAI which the Committee deems necessary to be examined for formulation.
c) To examine recommendations made by ICAI.
d) To recommend NFRA on the new or amended standards for its approval and to be forwarded to the Central Government to be notified as a part of accounting standards.
e) To scrutinize the financial statements of such companies as decided by the Committee on Accounting Standards or NFRA and to issue such reports to NFRA.
Functions of Committee on Auditing Standards:
Apart from the above similar functions as Committee on Accounting Standards, the Committee on Auditing Standards has to discharge the following functions:-
i) To examine matters relating to formulation and laying down auditing standards for consideration by NFRA.
ii) The Committee on Auditing Standards shall monitor the compliance of auditors, audit firms and the audit LLPs.
iii) It may investigate or review selected audit engagements including an individual or firm or an LLP.
iv) The Committee may evaluate the sufficiency of the quality control system of the auditor and manner of documentation and communication of that system by the auditor.
Functions of the Committee on Enforcement:
i) To investigate matters relating to professional or other misconduct committed by auditor, individual, firm or an LLP on recommendation by NFRA.
ii) The Committee on Enforcement shall complete its investigation within a period of 6 months on any matters referred to it. In case of delay, specific time extension has to be sought by providing reasonable justifications to NFRA.
Complaint filing authorities and procedures:
1) A complaint may be filed by or on behalf of any Central or State government which shall be authorized by persons holding the rank of Joint Secretary or equivalent and signed by person who is an Under Secretary or equivalent in the Central or State government.
2) A complaint filed by Reserve Bank of India (RBI) or Securities Exchange Bank of India (SEBI) or any Regulator, shall be authorized by an officer holding the post of Joint Secretary to the Government of India and signed by an officer holding the equivalent post of Under Secretary or equivalent to the Central or State Government.
3) A complaint filed by a company, bank or a firm shall be accompanied by a resolution duly passed by the Board of Directors of the company or bank or the partners of the firm specifically authorizing an officer or a person to make the complaint on behalf of the company, bank or firm.
4) Every complaint received by the Office of Committee of Enforcement shall be acknowledged by ordinary post together with an acknowledgement number.
Fees: Any complaint made by any person other than the Central or State government, company, statutory authority shall be accompanied by a fee drawn in the form of a demand draft on any bank in India in favour of the NFRA payable at a place where the Office of Committee on Enforcement is situated.
Registration of Complaints:
1) The Member-Enforcement or an officer authorized by it shall endorse on every complaint the date on which it is received and shall sign on each such endorsement.
2) The Member-Enforcement shall scrutinize such received endorsements.
3) After scrutiny, if the complaint is in proper order, it shall be duly registered and a unique reference number shall be allotted which has to be quoted in all future correspondence.
Withdrawal of Complaint: On receipt of any letter of withdrawal, the Member- Enforcement shall place it before the Committee on Enforcement and if it is of the view that if the circumstances so warrant, it may permit the withdrawal at any stage.
Investigation procedures of Complaints:
A) The Member- Enforcement shall within 60 days after receipt of complaint shall:-
1) in case of complaint against an individual professional, send particulars of acts of commission or a copy of the complaint to the Professional at his professional address.
2) in case of complaints against a firm, send particulars of the acts of commission to the firm at the address of its head office as entered last in the Registrars of Offices and firms maintained by ICAI.
B) A member whose name is disclosed by the firm shall be responsible for answering the complaint
C) A member who has been informed about a complaint filed against him shall within 21 days and not exceeding 30 days of the service of complaint; forward a written statement in his defence to the Member- Enforcement.
D) On receipt of the written statement, the Member- Enforcement shall send a copy to the complainant. The complainant shall within 21 days not exceeding 30 days forward to the Member- Enforcement his rejoinder on the written statement.
E) On perusal of the complaint, the respondent’s written statement and rejoinder of the complainant, the Member- Enforcement may call for additional particulars or documents connected therewith from the respondent or complainant as he may consider appropriate.
Mode of sending notice:
Every notice or letter issued by the Member Enforcement shall be sent to the member or the firm by registered post with acknowledgement due or by speed post
a) The headquarters of NFRA shall be at New Delhi,
b) The Central Government may constitute and Appellate Authority consisting of a Chairperson and not more than two other members for hearing appeals arising out of orders of NFRA.
c) Any person aggrieved by any order of NFRA may prefer an appeal to such Appellate Authority constituted by the Central Government.
d) The qualifications for appointment, manner of selection and terms of service of the Chairperson and other members for appointment to the Appellate Authority are to be followed by NFRA as prescribed.
e) The Central Government may appoint a secretary or other employees for the smooth functioning of NFRA, if it deems necessary.
f) The NFRA may be caused to maintain such books of accounts prescribed by the Central Government in consultation with the Comptroller and Auditor General of India (CAG).
g) The accounts of NFRA must be audited and certified by the CAG together with the audit report and forwarded to the Central Government by NFRA.
h) NFRA has to prepare an annual report stating a list of activities undertaken in a financial year and forward a copy to the Central Government. Thereafter the audit and annual report given by CAG has to be laid before each house of Parliament.
The introduction of NFRA is an important step to build up a transparent mechanism for accounting, auditing and financial reporting. Unlike NACAS, NFRA will not be just being an advisory body; instead it has been empowered to regulate accounting standards and auditing policies along with powers to investigate certain matters related to professional misconduct by chartered accountants in corporate bodies. Therefore, it has a huge role to play in the field of financial reporting for effective corporate governance.
(The article has been written based on the Draft Rules published by the MCA, as on 10 March, 2014)