On March 1, 2018, the establishment of the National Financial Reporting Authority was approved by the Union Cabinet. The authority is an independent regulator that will audit or oversee auditors’ work under Section 132 of the Companies Act, 2013. The authority is created to establish as well as enforce auditing and accounting standards and oversee the work of auditors.
Reason for Establishing the National Financial Reporting Authority (NFRA)
The Central Government has the power to establish an authority like the National Financial Reporting Authority under Section 132 of the Companies Act, 2013. A proposal to institutionalise the National Advisory Committee on Accounting Standards was also recommended in the Companies Bill, 2009, by a Parliamentary Standing Committee.
One of the prime reasons for the establishment of the National Financial Reporting Authority is the multi-crore fraud that was reported at Punjab National Bank.
Under Section 132 of the Companies Act, 2013, the National Financial Reporting Authority can carry out the following functions:
- Propose to the Central Government formulation of auditing and accounting standards and policies to be adopted by auditors and companies.
- Enforce and monitor such policies and standards.
- Ensure that the quality of services of all professions connected with the conformity of these policies and standards.
What are the Powers of the National Financial Reporting Authority?
The National Financial Reporting Authority has a chairperson, a secretary, and 3 full-time members. The following are the powers of the authority:
- It can make investigations into misconduct or professional matters of any individual working in a chartered accounting firm.
- It can make inspections of any documents, books, or registers of any firm/professional probed.
- It has the power to issue summons and examine an oath.
- It can impose penalties up to and including debarring professionals in a firm.
What is the Role of the Institute of Chartered Accountants in India (ICAI) After the Establishment of the National Financial Reporting Authority?
The role of the Institute of Chartered Accountants in India will remain the same so far as its members are concerned. Its role shall also continue with regards to audits related to public unlisted companies and private limited companies under the threshold limit to be mentioned in the rules. The institute shall maintain its advisory role on auditing and accounting standards and policies by making suggestions and recommendations to the National Financial Reporting Authority.
Possible Penalties for Misconduct Imposed by the National Financial Reporting Authority
In case a professional or a firm is guilty of misconduct, he/she shall be at the receiving end of the following penalties:
- More than Rs.1 lakh, but the penalty could increase to 5x the fees received (for individuals)
- More than Rs.10 lakh, but the penalty could increase to 10x the fees received (for firms)
- Debarring the firm or the professional from involving itself or himself/herself from practice as an Institute of Chartered Accountant of India member, as mentioned in clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 for at least 6 months or more, but not more than 10 years, as determined by the National Financial Reporting Authority.