The NFRA is a legal watchdog for the auditing profession. The Punjab National Bank fraud prompted the government to establish an NFRA as the legal regulator for the auditing profession.
The ICAI was mandated to keep an eye on erring auditors in the past. The NFRA was created due to this scandal and is now the governing body of the audit profession in India.
To understand the role and functions of the National Financial Reporting Authority, one needs to understand its composition. In this article, we will also discuss its powers and scope. We will examine its role and powers and invite other experts to perform related functions.
NFRA is the government body responsible for setting accounting standards in the country. Its mandate is to improve the quality and consistency of financial statements in the country and ensure that businesses and financial institutions disclose accurate and fair information.
Did You Know?
NFRA is a non-political body with a chairperson appointed by the Central Government. The NFRA can probe listed as well as unlisted public companies. Companies must have a paid-up capital of ₹500 crores and an annual turnover of ₹1,000 crores.
Also Read: What are the major accounting conventions?
Composition of the NFRA
The National Financial Reporting Authority was created by the Supreme Court of India to strengthen the regulatory process of the audit profession. It will enforce accounting standards and supervise auditors. It's a government body whose members include listed companies, securities and subsidiaries. The authority consists of a chairperson, three full-time members and a secretary.
- The total number of members should not exceed fifteen. All members of the NFRA must declare no conflicts of interest.
- The chairman and the other full-time members must not hold a position in an audit or consultancy firm.
- The other members should not be associated with any financial firm during their engagement, but they should not hold a similar position after they depart from NFRA.
- To monitor and regulate compliance with the accounting standards, the National Financial Reporting Authority should also maintain books of accounts and other records relating to accounts.
- The Comptroller and Auditor-General of India should audit the accounts of the NFRA. The Auditor-General of India may require thorough auditing of an organisation's accounts.
- A member of the authority should be independent of the government and be subject to rigorous auditing standards. It should also have the authority to reject written objections or clarifications.
- While the ICAI initially had reservations about the NFRA, it later realised that it would help ensure that standards are consistently adhered to. And it would also help in enforcing existing accounting and auditing legislation.
- The NFRA will have jurisdiction over listed and large unlisted companies. Other entities may also be referred for investigation by the Central Government.
- Some prerequisites to becoming a member of the NFRA include paid-up capital of ₹500 crores, turnover of at least ₹1000 crores per annum, outstanding loans, debentures and deposits of at least ₹500 crores.
What is NFRA & Its Role?
If we talk about the role of the NFRA, it is a statutory body under the Companies Act, 2013. Its primary function is to supervise compliance with Auditing Standards and Accounting Standards for Public Interest Entities.
- The NFRA oversees the Quality Review Board. Its role will continue to be quality auditing of public, listed and private companies. This will allow the NFRA to help frame legislation governing accounting and auditing.
- NFRA has the power to investigate professional misconduct, impose penalties and even debar a CA from practising for ten years.
- In addition to overseeing the auditing profession, the NFRA also provides advice to the Central Government on accounting standards and auditing rules.
- The National Financial Reporting Authority can also conduct misconduct investigations and inspect books, documents and oaths.
- Besides setting standards for auditors and auditing firms, the NFRA will also be responsible for ensuring the quality of services provided by its members.
- The NFRA may also form study groups, advisory committees and task forces. These groups are responsible for promoting public awareness of auditing standards and auditor responsibilities and quality.
- If the auditors are guilty of fraud, the regulator may sanction them with debarment for ten years or more. A fine of up to five times the fees paid by the auditor can also be imposed.
- The NFRA may also become a member of international or regional associations of independent audit regulators. In addition to these primary roles, the NFRA may also be responsible for the oversight of certain financial entities.
- Its mandate now includes the development of standards that apply to all businesses and professions. The NFRA can also conduct studies of various sectors and invite other experts to help.
- The NFRA may also invite other experts to help develop accounting standards and perform other related functions. It was previously the Central Government that prescribed accounting standards based on recommendations of the ICAI. However, the NFRA has replaced this committee.
Powers of the NFRA
Now that you understand NFRA's meaning let’s know its powers. The NFRA's new powers will complement those of the ICAI. The ICAI will continue to act as a regulator for the accounting profession, with the National Financial Reporting Authority assisting in framing and enforcing legislation. ICAI expressed reservations about the NFRA's proposed creation, saying that it would create two regulatory bodies for the same profession and duplicate efforts.
- The NFRA has the same powers as the Civil Court. It may demand the production of books of account, oaths and other documents and may examine persons under oath.
- The National Financial Reporting Authority (NFRA) has the power to investigate any misconduct involving the Chartered Accountants or CAs who are members of the prescribed class.
- It may initiate proceedings and impose significant fines on erring auditors.
- The NFRA has the authority to investigate matters of misconduct involving CAs and Chartered Accountants.
- The NFRA can impose a penalty of not less than ₹1 lakh but not exceeding 5 times the fees collected. Also, the NFRA may also investigate and take action against individuals who violate the rules of professional conduct.
- It has the power to initiate investigations on its own and upon referral from the Central Government.
- It can also issue commissions to examine witnesses, and it has the power to issue debarment orders and appeals.
- The NFRA has wide powers and can suspend or bar an auditing firm or member from practising. NFRA can also take action against an audit firm or auditor if it finds that a member has not been following the rules in their work.
- The NFRA also has the power to invite other experts to perform related functions.
- It can make recommendations for changes to the ICAI's rules and regulations. This can help improve the quality of service in the accounting profession.
Scope of the NFRA
The NFRA was established under the Companies Act, 2013 and is administered by the Ministry of Corporate Affairs. The government's decision to notify the NFRA comes after the Punjab National Bank scandal, which involved a billionaire, fraudulent guarantees and a faulty accounting system.
These scandals led to questions about the role of internal auditors in these situations. The NFRA is a body under the Companies Act that has the power to oversee auditing policies and accounting standards. It can also investigate specific cases of professional misconduct. It plays a critical role in corporate governance and financial reporting.
In addition to oversight of the auditing process, the NFRA is responsible for the integrity of financial statements. It is responsible for preventing misconduct, promoting transparency and ensuring that financial statements are based on reliable information.
Its composition should be an independent board of three full-time Members and a secretary.
According to the draft NFRA rules in this regard, auditors or audit firms that audit the following companies or branches (including through the network/brand it belongs to) are covered.
- Audit of below 200 companies in a year;
- Audit of below 20 listed companies;
- Company or companies ( listed/non-listed), having:
- Net Worth below ₹500 crores; or
- Paid-up capital below ₹500 crores; or
- Annual turnover below ₹1000 crores;(As of 31st March of the financial year); OR
- Company/Companies listed outside India
The authority must maintain books of account and other books related to accounts and shall consult the Comptroller and Auditor-General of India for the purpose of auditing. The authority must have its accounts audited by the Comptroller and Auditor-General of India regularly, and it must also provide a report to the Central Government.
The NFRA shall also ensure that it is independent of audit firms and related consultancy firms. The NFRA will also oversee the practices of firms and chartered accountants. Its scope will be limited to auditing large listed and unlisted companies, and the Centre will refer such entities to it. Now keep track of your cashflow and manage your incomes and expenses with ease by using the Cashbook app by Khatabook.