It has been Five years since the Companies Act, 2013 provided for the creation of a National Financial Reporting Authority (NFRA), and now Government has actually taken steps to implement NFRA.
The Ministry of Corporate Affairs (MCA) vide its notification dated November 13, 2018, has notified National Financial Reporting Authority (NFRA) Rules, 2018, determining the jurisdiction, function, and duties of the NFRA, as also its powers. Let’s have a Quick summary of it:
A. WHAT IS NFRA?
National Financial Reporting Authority (NFRA) is a body proposed in Companies Act 2013 for the establishment and enforcement of accounting and auditing standards and oversight of the work of auditors.
The Centre has appointed former IAS officer Rangachari Sridharan as chairperson of NFRA.
B. WHY THE NEED FOR NFRA?
The non-performing assets (NPA) situation illustrates all that is wrong with auditing. Even banks are subject to different kinds of Audit (e.g. Concurrent/Branch/Stock audit etc.) yet NPAs are at alarming levels.
Recently there have been large-scale frauds in banking sectors have forced the government to take the steps on an urgent basis. The decision appears to have been prompted by the latest bank scam to have hit the headlines — the ₹12,636 crore Punjab National Bank fraud that went undetected by auditors.
In the wake of currents big banking frauds, the NPA crisis, Tax evasion have played major roles in bringing the NFRA into existence. Also, Most of the major economies of the world have independent audit regulators and therefore, India also needs to match up with them as well.
C. WHICH COMPANIES WILL BE COVERED BY NFRA?
The Authority shall have the power to monitor and enforce compliance with accounting standards and auditing standards, oversee the quality of service or undertake the investigation of the auditors of the following class of companies and bodies corporate, namely:-
Ø All Listed Companies/ Listed Body Corporate;
Ø Unlisted Companies which
o Turnover is Rs. 1000 Cr. or More; OR
Ø All Banks/ Insurance/ Electricity Companies;
Ø Foreign Subsidiary/Associate company of Any Indian company as mentioned in above 4 points if Income/Net worth of such Foreign Subsidiary/Associate company exceeds 20% of consolidated Income/Net worth of Above mentioned Indian companies.
Some Important Points:
· Once a Company falls under the above limits under NFRA, will be covered by NFRA for 3 More years EVEN IF LIMITS ARE REDUCED/ LISTED STATUS CHANGES LATER ON.
· Every Body Corporate other then Company as defined u/s 2(20) formed in India and governed under this rule shall, within fifteen days of appointment of an auditor under sub-section (1) of section 139, inform the Authority in Form NFRA-1, the particulars of the auditor appointed by such body corporate.
D. FUNCTIONS AND DUTIES OF AUTHORITY:
§ maintain details of particulars of auditors appointed in the companies and bodies corporate specified in rule 3;
§ recommend accounting standards and auditing standards for approval by the Central Government;
§ monitor and enforce compliance with accounting standards and auditing standards;
§ oversee the quality of service of the professions associated with ensuring compliance with such standards and suggest measures for improvement in the quality of service;
§ promote awareness in relation to the compliance of accounting standards and auditing standards;
§ co-operate with national and international organizations of independent audit regulators in establishing and overseeing adherence to accounting standards and auditing standards; and
§ perform such other functions and duties as may be necessary or incidental to the aforesaid functions and duties.
E. FILING OF ANNUAL RETURN BY AUDITOR:
Every auditor referred above shall file a return with the Authority on or beforein such form as may be specified by the Central Government.
F. PUNISHMENT IN CASE OF NON-COMPLIANCE
If a company or any officer of a company or an auditor or any other person contravenes any of the provisions of these rules, the company and every officer of the company who is in default or the auditor or such other person shall be punishable as per the provisions of section 450 of the Act.
G. MONITORING AND REGULATING POWERS
Recommend Central Govt. w.r.t. AS and SAs and checking proper compliance of the same, oversee quality of audit firms.
H. INVESTIGATING AND SUMMONING POWERS
Investigation of audit firms, summoning and enforcing attendance, Inspection of records.
I. WHEN ICAI WILL STILL HAVE ITS POWER?
Proprietorship concerns, Firms, LLPs, Charitable Trust, AOP/BOI, Societies, etc. along with Private Companies and Unlisted Public Companies (Apart from that which are covered as under rule) would still be governed by ICAI and ICAI would have the sole discretionary power to provide rules and regulation for them.
The ICAI will continue to retain its regulatory powers in respect of private companies and unlisted public companies below the above-prescribed threshold.
Also, the Quality Review Board (QRB) will also be there to continue conducting quality audits in respect of private limited companies, unlisted public companies and such other audit of companies that are delegated by the NFRA.
But any reform steps can’t be successful unless it consists of proper mechanism and there is also acceptance among the stakeholders. Seeing the current situation of autonomous bodies like CBI, RBI, and even the Judiciary in the country, only time will tell what and how much it is going to be actually effective.
Although, the real success of NFRA would totally depend upon the bureaucracy which would consist in it otherwise it would be simply just giving the key from one Authority to the other which is even more polluted..!!
What do you think about the NFRA rules? Please do share your thought, ideas, and opinions through the comment below. Thanks. Be Helpful to One Another..!!