“Union Cabinet has now approved the proposal for establishing the National Financial Reporting Authority (NFRA), intended to serve as an independent regulator for the auditing profession. We believe establishment of NFRA as an independent regulator for the auditing profession will improve the transparency and reliability of financial information presented by listed and unlisted companies in India. ”

National Financial Reporting Authority (NFRA) is a body proposed in CA 2013 for the establishment and enforcement of accounting and auditing standards and it would oversee the services and quality of services provided by the auditors and mainly listed companies and large unlisted public companies will fall under the jurisdiction of NFRA. It will be an audit watchdog and a regulator for the Government.

Government of India has recently set up the National Financial Reporting Authority (‘NFRA’), which will be an independent regulator for the audit professionals. Section 132 of the CA 2013 deals with the constitution of ‘NFRA’ and power of central government to appoint Chair person, member, secretary and other staff at NFRA. MCA has also notified NFRA (Manner of appointment and other terms and conditions of service of Chairperson and Members) Rules, 2018.

These sub-sections have been notified at a time when the incidence of financial frauds committed with the help of auditors are coming out in the open. NFRA is expected to play a bigger role in curbing the involvement of the professional in financial frauds or cases of professional misconduct.

“NFRA is the authority proposed to serve as an independent regulator for the auditing profession and to investigate professional matters or misconduct of any member or a firm of CA’s.”

WHAT IS NATIONAL FINANCIAL REPORTING AUTHORITY (‘NFRA’):

The idea for NFRA came after the Satyam scam in 2009, following which the Standing Committee on Finance recommended the creation of an audit regulator. Later CA, 2013 section 132 (1) authorized the Central Government to constitute a National Financial Reporting Authority to provide for matters relating to accounting and auditing standards. The role of NFRA is:

– To make recommendations to the Central Government on the formulation and laying down rules for accounting and auditing policies and standards for adoption by companies or class of companies or their auditors, as the case may be;

– To monitor and enforce the compliance with accounting and auditing standard;

– To oversee the quality of service of the professionals associated with ensuring compliance with accounting and auditing standard;

– To suggest measures required for improvement in the quality of service of the professionals;

Constitution of NFRA?

NFRA will comprise of a chairperson, three full-time members and a secretary. The number of members including full time and part time members will not exceed 15. The Central Govt. has right to appoint the chairman and other members of NFRA on the recommendation of the search-cum-selection committee.

Chairperson and full time members of NFRA shall not be associated with any audit firm (including related consultancy firms) during the course of their appointment and two years after ceasing to hold such appointment and will give a declaration to the Central Govt. regarding no conflict of interest or lack of independence in respect of their appointment to the NFRA.

Central Govt. may also appoint a secretary and such other employees as it may consider necessary for the efficient performance of the functions by NFRA.

NFRA (Manner of appointment and other terms and conditions of service of Chairperson and Members) Rules, 2018 covers detailed provisions regarding the composition of NFRA and the terms and conditions of the appointment of the Chairperson and members of NFRA.

What will be ICAI’s role now?

The role of ICAI stands significantly diluted. ICAI’s role will continue in respect of its members, in general, and, specifically, with respect to audits pertaining to private limited companies and public unlisted companies below the threshold limit to be notified in the rules.

ICAI would continue to play its advisory role with respect to accounting and auditing standards and policies by making its recommendations to the Central Govt. As listed companies and large unlisted companies will fall under the jurisdiction of NFRA, the audit of private companies and unlisted companies (below threshold limit) will be under ICAI.

In a way, it indicates a certain lack of trust in ICAI to effectively address malpractices indulged in by recalcitrant members.

How does the community view it?

‘Chartered accountants are watch-dogs, and not blood-hounds,’ goes an argument. Things turn bad when entries are not recorded at all. In such instances, CAs can do very little, it is argued.

Powers of NFRA:

Apart from making recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards, the NFRA will have the investigative and disciplinary powers. NFRA can: