National Financial Reporting Authority(NFRA): Composition, Powers & Scope

Established according to Section 132 of the Companies Act 2013, the National Financial Reporting Authority (NFRA) is a body constituted under this act. This authority’s constitution came into force on October 1st, 2018. In this sense, the Central Government’s goal seems to be establishing a distinct, independent regulatory organization to support the creation and implementation of laws about accounting, auditing, and enhancing public and investor trust in an entity’s financial reporting. It is stated that the necessity for this authority developed in reaction to several recent business frauds.

Geeky Takeaways:

• Good accounting and auditing practices are essential to business governance.
• The National Financial Reporting Authority (NFRA) came into existence by Section 132 of the Companies Act 2013.
• The Central Government established the National Advisory Committee on Accounting Standards (NACAS) to guide the development and establishment of accounting standards and auditing procedures, as per Section 210A of the Companies Act, 1956.
• The National Financial Reporting Authority (NFRA) will take on the role of NACAS under the 2013 Companies Act.
• The National Financial Reporting Authority (NFRA) is a quasi-judicial organization that oversees many areas of accounting and auditing.

What is NFRA?

The Companies Act, 2013 (henceforth referred to as “the Act”), Section 132, authorizes the Central Government to establish the NFRA in order to address accounting and auditing-related issues. In order to help corporations and their auditors implement accounting and auditing rules and standards, NFRA provides suggestions to the Central Government. Insofar as it may be mandated, NFRA plays a significant role in overseeing and enforcing adherence to accounting and auditing standards. Additionally, NFRA monitors the level of service provided by the professions involved in guaranteeing adherence to these standards. It also recommends actions necessary to enhance the level of service and addresses other relevant issues as may be mandated.

Why is NFRA Needed?

1. Complete Independence Is Required for Auditing: Before financial statements are given to different stakeholders, auditors are tasked with verifying their accuracy and veracity. But since the auditee corporation also pays the auditor, there is an inherent conflict of interest in the auditing process. Therefore, they are subject to regulations, auditing standards, and possible liabilities in order to guarantee that the auditor fulfills his responsibilities to the intended levels.
2. There Must be an Independent Regulator: Following the global wave of accounting frauds, other major nations have also adopted a similar approach, with the establishment of independent regulators such as the PCAOB (US) and FRC (UK). India is thus likely to follow suit given that it is one of the greatest economies in the world. The Self-Regulation Model’s Deficits the current democratic system for selecting regulators is rife with compromises and tends to draw in experts who might not be the most qualified for the job. It is not reasonable to expect members or their elected representatives to take self-defense measures. It’s comparable to having pupils mark their own assignments.

3. Other Regulators’ Request: An international consultant was hired by SEBI to review their organizational and structural problems. At the moment, upholding accounting, auditing, and ethical standards falls under the purview of the ICAI. On the other hand, the ICAI’s oversight is primarily passive and pays little attention to ongoing inquiries. Furthermore, the sheer volume of auditors in India (about 15,000 as opposed to 3,000 in the USA) makes monitoring difficult. Long term, we advise SEBI to lead the push for the creation of an independent, stand-alone regulator (NFRA) unrelated to the audit industry.

Composition of NFRA

The Companies Act mandates that the NFRA have a maximum of 15 members and a chairperson who shall be chosen by the Central Government. The following requirements must be met before such a chairman and members may be appointed:

• They must to be knowledgeable in law, finance, accounting, and auditing.
• They must certify to the Central Government that their appointment is free from conflicts of interest and lacks independence.

During their term of office and for two years following it, all members, including the chairman, who are employed full-time, should refrain from having any affiliation with audit companies, including related consultant businesses.

Prescribed terms and conditions have not yet been established for the appointment of the chairman and members. Nonetheless, the following breakdown of the power is outlined in the draft NFRA rules:

• The chairperson is a distinguished individual with experience in accounting, auditing, finance, or law and is a chartered accountant;
• Member: Auditing; Member: Enforcement; Member: Accounting;
• One MCA delegate who has an ex-officio position comparable to that of joint secretary or higher
• The RBI will designate one representative to serve as a member of the RBI Board;
• SEBI shall designate one representative, who may be either the Chairman of SEBI or a full-time member;
• An individual who has served as a high court judge for more than five years or as a retired chief justice must be nominated by the Central Government. The ex-officio president of the Institute of Chartered Accountants of India.

Any additional individual may be invited to the meeting by the chairman to offer their professional judgment.

Powers of NFRA

The following are the powers that the NFRA will have: looking into cases of professional or other misconduct by a specific class of CA firms or CAs. When the NFRA starts an investigation, no other authority may begin or continue the process. Such an inquiry may be started suo moto, or on its own, or in response to a referral from the Central Government. The same authority as a Civil Court in relation to a lawsuit concerning the following topics as specified by the Code of Criminal Procedure, 1908.

• Finding and producing books of account and other documents at a time and location that the NFRA may designate.
• Calling them, making them appear, and questioning them under oath.
• Examining any person’s books, registrations, or other papers at any location.
• Granting commissions to examine documents or witnesses.

It has the authority to apply the following sanctions in cases where wrongdoing, whether professional or otherwise, is proven:

Penalty:

• Between ₹1,00,000 and five times the fees earned for individuals; between ₹5,00,000 and ten times the fees received for businesses;
• Debarring the member/firm from practicing as an ICAI member for a period of time that may range from six months to ten years.
• The Appellate Authority may then hear an appeal from anybody dissatisfied with the NFRA’s ruling.

Scope of NFRA

As was previously said, the NFRA has the authority to look into and evaluate the quality of work for a certain set of firms. Although the proposed NFRA Rules have not yet been adopted, if they were, the following class of businesses would be covered:

Companies listed in India

Unlisted Companies whose:

• Net worth ≥ ₹500 crore; or
• Paid up Capital ≥ ₹500 crore; or
• Annual turnover ≥ ₹1000 crore (As on 31st March of the preceding financial year); OR
• Companies whose securities are listed outside India

In addition, the NFRA has the authority to look into allegations of professional or other misconduct by a member or firm of Chartered Accountants or auditors against a specific class of corporate organizations or individuals (auditors). According to the draft NFRA standards, the following categories of organizations or their branches (including through the network/brand to which it belongs) are audited by auditors or audit firms, whether directly or indirectly:

• Audit of ≥ 200 companies in a year;
• Audit of ≥ 20 listed companies;
• Company or companies (whether listed or not), having:
  • Net Worth ≥ ₹500 crores; or
  • Paid up Capital ≥ ₹500 crores; or
  • Annual turnover ≥ ₹1000 crores;(As on 31st March of the immediately preceding financial year); or
  • Company or Companies listed outside India

Note: The following situations exempt corporations from the aforementioned restriction.

Either the NFRA chooses on its own to launch an inquiry in the public interest, or the Central Government or any regulator refers the NFRA to conduct such an investigation.

Conclusion

A crucial first step in creating an open system for accounting, auditing, and financial reporting is the implementation of NFRA. In contrast to NACAS, NFRA will not only serve as an advising body; rather, it has the authority to control auditing procedures and accounting standards in addition to having the authority to look into specific cases of professional misconduct on the part of chartered accountants in corporate organizations. As a result, it is crucial for good corporate governance in the area of financial reporting.

National Financial Reporting Authority(NFRA)- FAQs

Which act has enforced the provisions of NFRA?

Section 132 of the Companies Act of 2013 has constituted NFRA.

What is the maximum number of members to be admitted to the NFRA?

The Companies Act mandates that the NFRA have a maximum of 15 members and a chairperson who shall be chosen by the Central Government.

How many committees are there in the NFRA?

There are three committees in the NFRA:

i) Accounting Standards Committee,

ii) Auditing Standards Committee, and

iii) Enforcement Committee.

Who is the current chairman of the NFRA?

Dr. Ajay Bhushan Prasad Pandey is the current chairman of the NFRA

How many NFRA compliance forms are available?

There are two NFRA compliance forms available. NFRA 1 and NFRA 2

Note: The information provided is sourced from various websites and collected data; if discrepancies are identified, kindly reach out to us through comments for prompt correction.