Context: The National Financial Reporting Authority (NFRA) is set to conduct its first annual inspection of eight audit firms, including the Big Five.

About National Financial Reporting Authority (NFRA)

• The National Financial Reporting Authority (NFRA) is a body constituted under the provisions of Section 132 of the Companies Act, 2013. The constitution of this authority is effective from 1st October 2018. The aim of the Central Government in this regard appears to be:

• Setting up of a separate and independent regulatory body to assist in the framing and enforcement of legislation relating to accounting & auditing and

• Improving investor and public confidence in the financial reporting of an entity.

• Supposedly, the need for this authority arose as a response to various corporate scams in recent times.

Composition of the NFRA

• The Companies Act requires the NFRA to have a chairperson who will be appointed by the Central Government and a maximum of 15 members. The appointment of such chairperson and members are subject to the following qualifications:

• They should be having an expertise in accountancy, auditing, finance or law.

• They are required to make a declaration to the Central Government that there is no conflict of interest or lack of independence in their appointment.

• All the members including the chairperson who are in full-time employment should not be associated with any audit firm (including related consultancy firms) during their term of office and 2 years after their term.

• The terms and conditions relating to the appointment of the chairperson and members have not yet been prescribed. However, the draft NFRA rules outline the following composition of the authority:

• Chairperson is a Chartered Accountant and a person of eminence having expertise in accountancy, auditing, finance or law;

• Member – Accounting;

• Member – Auditing;

• Member – Enforcement;

• One representative of the MCA not below the rank of Joint Secretary or equivalent (ex-officio)

• One representative of RBI, being a member of the RBI Board is to be nominated by the RBI;

• One representative of SEBI, being the Chairman of SEBI or whole-time member of SEBI is to be nominated by SEBI;

• A retired chief justice of high court or a person who has been the judge of a high court for more than 5 years is to be nominated by the Central Government,

• President of the Institute of Chartered Accountants of India (ex-officio)

• The Chairman may also invite any other person to the meeting to give their expert opinion.

Role of the NFRA

The NFRA has the following responsibilities:

• Make recommendations on the foundation and laying down of accounting and auditing policies and standards;

Monitor and enforce the compliance of the accounting standards and auditing standards:

• Oversee the quality of service of the professionals (such as auditors, CFOs, etc) and suggest measures required for improvement in the quality of service;

• Perform such other functions related to the above.

• Prior to the constitution of this authority, the Central Government would prescribe accounting standards on the recommendation of ICAI. The ICAI would prescribe the same only after consulting with the National Advisory Committee on Accounting Standards who will provide their recommendations.

• The ICAI will now have to consult with the NFRA and examine its recommendations in this regard. Thus the National Advisory Committee on Accounting Standards is effectively replaced by the NFRA.

Powers of the NFRA

The NFRA shall have the following powers:

• To investigate the matters of professional or other misconduct committed by a prescribed class of CA firms or CAs. No other authority can initiate or continue proceedings where the NFRA has initiated an investigation. Such an investigation can be initiated either suo moto (by itself) or on a reference made by the Central Government.

• The same powers as a Civil Court under the Code of Criminal Procedure, 1908, in respect of a suit involving the following matters.

• Discovery and production of books of account and other documents, at such place and time as may be specified by the NFRA

• Summoning and enforcing the attendance of persons and examining them under oath

• Inspection of any books, registers, and other documents of any person at any place

• Issuing commissions for the examination of witnesses or documents

• Where professional or other misconduct is proved, it shall have the power to impose the following punishment:

Penalty

• For individuals a fine between Rs. 1,00,000 to 5 times the fees received;

• For firms a fine Between Rs. 5,00,000 to 10 times the fees received;

• Debarring the member/firm from practice as a member of ICAI between 6 months to 10 years as may be decided

• Any person who is not satisfied with the order of the NFRA can then make an appeal to the Appellate Authority.

Jurisdiction of NFRA

• The jurisdiction of the NFRA for the investigation of Chartered Accountants and their firms would extend to listed companies and large unlisted public companies, the thresholds for which shall be prescribed in the Rules.

• The Central Government can also refer such other entities for investigation where public interest would be involved.

• Head Office: New Delhi