In the wake of recent liquor baron, diamantaires escaping the clutches of Judiciary by keeping out of Indian Jurisdiction and carrying out massive economic frauds with the investors 2 , also in light of the notification for disqualification of numerous directors whose companies had failed to file annual returns 3 had sparked the Government to undertake a twofold action for avoiding such situations in future. Firstly, is the commitment to bring such economic offenders to justice by enacting the Fugitive economic offenders Act, 2018, and secondly, the government recognised the root cause of scams was improper compliance by the Companies and their Auditors with respect to auditing and accounting practices mandated by the law, prompting a move to regulate and discipline such auditors and companies by establishing a regulator i.e. National Financial Reporting Authority (NFRA).
NFRA can be found under Section 132 of the Companies Act, 2013 (interestingly, the penultimate Section remaining to be enforced) which shall act as an independent regulator to ensure monitoring and compliance of accounting and auditing standards, to oversee quality of service of professionals associated and for the strict compliance of the Companies with the Accounting Standards. The Authority shall be replacing the National Advisory Committee on Accounting Standards (NACAS) which currently advises the government on setting accounting practices and standards in consultation with the ICAI which are prescribed by the Central Government but does not have the enforcing powers.
WHY IS INTRODUCTION OF NFRA SIGNIFICANT?
NFRA will be responsible for:
(a) Formulation of accounting and auditing policies/standards and recommending the same to the Central Government- this function was exercised by NACAS as well, the Central
Government shall prescribe accounting standards as recommended by the ICAI in consultation with and after examining the recommendations made by the NFRA.
(b) Supervising and enforcing compliance with the auditing and accounting standards – this power was not available with NACAS and is therefore new in the provision. This is one of
the most significant power conferred upon NFRA, which was added after recommendations from the Parliamentary Standing Committee proposing to set up an oversight body to set
standards and supervise the quality of audit due to rising instances of corporate misgovernance.
(c) Overseeing the quality of service of the professions associated with ensuring compliance with such standards – Earlier the accounting standards were set up by the professionals with
the Accounting standards board under the ICAI Act and on any misconduct done by an Auditor action can be taken by the Disciplinary committee of ICAI, but since there was
inaction by the professional bodies to discipline the auditors, a need for an independent regulator was recognized. The NFRA has been given suo motu powers to take up investigation and prescribe punishment in case it finds professionals and companies in contravention of the accounting practices.
(d) Suggesting measures for improvement in the quality of services and other matters of professionals- The NFRA has also been conferred with residuary powers to recommend measures for improvement to the Central Government. Since the current Accounting Standards are to be replaced by ‘IndAS’ in a phased manner to converge with the International Financial Reporting Standards 5 (IFRS), the need of this regulator to suggest changes and suggest measures for improvement in the professional standards and professions
associated (CA, CS, CWA) became a necessity.
The Companies Act, 2013 has also given teeth to the NFRA by conferring quasi-judicial power to oversee the quality of professionals associated with the compliance and it possess the powers to investigate and punish individuals and firms for noncompliance. 7 The act provides punishments such as hefty amounts extending up to five times the fees for Individuals and ten times the fees for firms and may also debar the individual or firm from practice in cases of proved professional or any other misconduct upto 10 years. Also, to ensure independence of the chairperson and members who are in full-time employment with NFRA in functioning and exercising the quasi-judicial powers 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, they are not permitted to hold any arbitration proceedings while in the employment. They also give up the right to practice before the authority after resignation, removal or retirement from it.
WHY DID ICAI TRIED TO DESIST THE GOVERNMENT FROM CONSTITUTING NFRA?
The purpose of introduction of NFRA was deliberated in the Report of the Companies Law Committee 2016 where the ICAI had objected the Constitution of NFRA stating that the ICAI is already discharging its regulatory functions with regard to discipline of the Auditor through a robust mechanism wherein a Board of Discipline and Disciplinary Committee with Government nominees has been entrusted with the responsibility. They remarked the constitution of NFRA as an interference in the functioning of the profession, multiple layers of regulation would lead to
delay/duplication of work and therefore suggested for omission of Section 132. But the Committee in majority had observed that major economies of the world had already established such regulatory bodies. The need for an independent body to oversee the profession was felt in view of the critical nature of responsibilities wherein lapses had been seen to cause serious repercussions. Though it had suggested that the government may consult with ICAI regarding NFRA’s jurisdiction.
NFRA NOTIFICATION AND TRANSITIONAL PROVISIONS FROM NACAS
The Companies (Accounts) Rules, 2014 contained transitional provisions which stated that until the time that NFRA is constituted the Central Government may prescribe standards of accounting as recommended by the Institute of Chartered Accountants of India in consultation with NACAS constituted under section 210A of the Companies Act, 1956. Since the Constitution of the NFRA was recently notified by the Ministry of Corporate affairs and which has come into force on 22 nd March, 2018. 10 The Central Government has institutionalized the authority which would not only be an advisory body to the Government in inducting auditing standards but also as a quasi-regulatory body for generally supervising quality of audit undertaken by the listed companies and large unlisted public companies which shall also give sufficient mandate to monitor quality of audit undertaken across corporate sector. The inherent regulatory role of ICAI as provided for in the Chartered Accountants Act, 1949 shall 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. The Quality Review Board (QRB) will also continue quality audit in respect of private limited companies, public unlisted companies below prescribed threshold and also with respect to audit of those companies that may be delegated to QRB by NFRA. Further, ICAI shall continue to play its advisory role with respect to accounting and auditing standards and policiesby making its recommendations to NFRA.
APPEALS FROM THE ORDER OF NFRA
The Act provides that the Central Government may constitute an Appellate Authority consisting of a Chairperson and two other members who shall hear appeals from the orders of the NFRA. 13 Any aggrieved person may appeal to such Appellate authority which is yet to be notified.
HOW DOES NFRA STAND IN LINE WITH OTHER REGULATORS IN THE WORLD?
In light of the major auditing failures in United States at Enron and WorldCom, the USA created the Public Companies Accounting Oversight Board (PCAOB) in 2002 and the UK also realising the need of an Independent regulator has conferred powers to ‘Conduct Committee’ under the Financial Reporting Council (FRC).
The NFRA has similar powers as with the PCAOB and the FRC
. to oversee the auditing compliance,
. set the accounting standards,
. conduct inspections and investigations and
. impose appropriate sanctions in order to protect investors and public interest
by promoting informative, accurate and independent audit reports.
The NFRA has been adopted and conferred powers to be similarly placed with the International Regulators to curb the instances of the Companies and auditors causing corporate mis-governance.