NFRA Rules, 2018 – A Critical Analysis

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    Paid up Capital is Rs. 500 Cr. or More; OR
o    Turnover is Rs. 1000 Cr. or More;  OR
o    AGGREGATE of Outstanding Loan, Debentures, and Deposit is
Rs.500 Cr. or More.
Above Limits shall be check on as on the 31st March of immediately   preceding financial year;
Ø  All Banks/ Insurance/ Electricity Companies;
Ø  Any Company or Person (Auditor), on a reference made to the Authority by the Central Government in public interest;
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:
·  Every existing body corporate other than a company governed by these rules shall inform the Authority within thirty days of the commencement of these rules, in Form NFRA-1, the particulars of the auditor as on the date of commencement of these rules.
·     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 before 30th April every year in 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.
J.     CONCLUSION
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..!!

12 thoughts on “NFRA Rules, 2018 – A Critical Analysis

  • November 24, 2018 at 8:57 am
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    Yes. Truly said. We all are seeing how the CBI has been just like a puppet in the Central Govt. hands and even now the state govts. are checking them from entering into states. Hope NFRA could fulfill its purposes in real sense.

    Although, I will always remain a BIG Supporter of ICAI.

    Reply
  • November 24, 2018 at 10:51 am
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    Yes. I am also a Big Supporter of Our ICAI (even they have no empathy for us; students). But what do you have to say about the RECENT BIG FRAUDS AND ICAI JUST LET THAT HAPPEN?

    Do you also support that????

    Reply
  • November 24, 2018 at 11:02 am
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    Of Course NOT. But do you think this is correct to BLAME ICAI FOR EVERY MISHAPPENING WITH THE ECONOMY?? Do ICAI have the sole responsibility for maintaining it?

    If talking about the PNB Fraud, WHERE THE HELL WAS RBI??? Busy fighting with Govt. !

    But the fact is WE ARE THE MOST VULNERABLE ONE and that's why we are being targeted every single time. Be it PM Modi Speech on 1 july the CA Day or Be it now the Introduction of NFRA.

    Believe me if this would have been the case of ADVOCATES then you would have seen Govt. on their Knees. You could have a glimpse of it in GST as well because their is no point in making them free from GST even most of the Advocates just exploit their client till their last penny of money.

    But in our case all I have to say here is ; SOMETIMES BEING MORE SOPHISTICATED MAKES YOU MORE VULNERABLE and that is the current situation of ICAI. #NFRA #ICAI.

    Reply
  • November 24, 2018 at 11:10 am
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    Well Said Ruchika. I really appreciate your point and really Agree with it.

    There is no UNITY in our profession which makes us VULNERABLE. That's a very true point.

    But there is also one thing which we must not denied that somewhere and somehow the ICAI has too a role in letting this fraud happen. Because there was no set example or disciplinary actions against their member which could act as a deterrent. And therefore their Member takes too much liberty at supporting and sometimes doing the frauds.

    What you have to say on this??

    Reply
  • November 24, 2018 at 11:27 am
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    Okay. Let's take your point. The ICAI has not taken disciplinary actions against their member.

    Now, let me remind you of a News (probably last year), a young man aged around 24 years went to the FORTIS HOSPITAL for RIGHT leg surgery because he met an accident and mistakenly HIS LEFT WAS OPERATED.

    NOW WHAT WOULD YOU SAY ABOUT IT??? IS IT NOT SOMETHING EVEN A COMMON PEOPLE WOULD EASILY RECOGNIZE IT THAT WHICH OF YOUR LEG HAS MET AN ACCIDENT?? BUT THE SO CALLED DOCTORS WERE NOT ABLE TO FIND IT..!!!

    PATHETIC..!!

    Now Fortis hospital has just settled the matter and everything is just fine (for them).

    And you tell me what kind of disciplinary action do you want against a CA? TO NULLIFIED HIS/HER MEMBERSHIP????

    Well, I hope how much time/(life) it actually take to be a CA..!!! You cant imagine just out of your fancy that their Membership should be striked off..! It is not just a course IT IS A FAR MORE THAN THAT…!!

    ONLY A PERSON WHO IS WILLING TO SACRIFICE HIS/HER HAPPINESS, ENJOYMENT, TIME, ENERGY AND LOT MORE UNCOUNTABLE THINGS. ONLY THAT PERSON BECOME A CA unlike other professions where It is quite certain that Once you taken into it you will be certainly out being as a Professional. But in CA the game is exact opposite, Here entry is comparatively easy but IT IS NOT CERTAIN AT ALL WHETHER YOU WILL BE FINALLY BECOME A CA OR JUST TRAPPED INSIDE IT…!!!

    Reply
  • November 25, 2018 at 11:42 pm
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    Very Nicely written Blog. Each and every point is very much clear about NFRA Rules, 2018 just by the time when I am travelling in Metro. Thank you Nitesh. You done a Great work..!!

    Reply
  • November 25, 2018 at 11:43 pm
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    Ruchika I have read your every single Comments and believe me I really appreciate your Aggression. Your points are very Practical and valid. Although, Rajat is not COMPLETELY WRONG. But yes, your points are Absolutely more strong..!! After all, we are women power. Hehehe. 😀

    Reply
  • November 25, 2018 at 11:46 pm
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    Nitesh I have also seen your replies over CACLUBINDIA. You are seriously amazing and always very explanatory. Thank for being such an enthusiast. 🙂

    Reply
  • November 27, 2018 at 10:33 pm
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    Yes, you are right Malvika. Nitesh's answers are very well explained.

    Reply
  • November 27, 2018 at 10:39 pm
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    To be honest, I have read so many articles on NFRA Rules since the rules has been out. But this is probably the first article which has been written so accurately and to the point.

    I would love to share it. Good job.!!

    Reply

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