National Financial Reporting Authority- New Regulator to Discipline Auditors (Download PDF)

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As part of the government’s effort to strengthen oversight of the audit profession, the Union Cabinet established an independent regulator- National Financial Reporting Authority (NFRA), which can investigate both chartered accountants and their firms.

Image of National Financial Reporting Authority

Image of National Financial Reporting Authority

Image of National Financial Reporting Authority

  • Move comes five years after the company law provided for such a body to strengthen oversight of the audit profession.

  • This was catalyzed by the large financial frauds in corporate and banking sector.

  • Separately, the Cabinet gave its nod for The Fugitive Economic Offenders Bill, 2018 to re-establish the law with respect to fugitive economic offenders.

  • Internationally, also independent regulators have been assigned these functions in over 50 countries.

Decision to Affect Institute of Charted Accountants in India

  • The Institute of Chartered Accountants of India’s (ICAI), current disciplinary mechanism framework is not being replaced by the NFRA, but only diluted to restrict its jurisdiction to the CAs of small companies and other categories of firms.

  • The oversight of auditors in respect of all public interest entities is being shifted to the NFRA, which will have a Chairman, three full-time members and a Secretary.

What Will Be the Powers of NFRA?

As per the Companies Act, 2013 the NFRA is tasked with

  • The job of recommending accounting and auditing standards, ensuring compliance with them, and overseeing the quality of service of the accounting and audit professions.

  • Power to investigate matters of professional misconduct by chartered accountants or CA firms, impose penalty and debar the CA or firm for up to 10 years.

  • Jurisdiction over listed companies and large, unlisted companies

Scope of NFRA

  • The NFRA will certainly be an oversight body.

  • The NFRA’s scope is being limited to cover CAs and CA firms involved in audit of listed companies and certain large unlisted companies.

  • Rules on the NFRA will prescribe the threshold of large unlisted companies.

  • The Centre would also refer to the NFRA such other entities for investigation where public interest would be involved.

  • No other institute or body shall initiate or continue any proceedings in such matters of misconduct where the National Financial Reporting Authority has initiated an investigation

What Was Need for NFRA?

  • The government’s decision to notify the NFRA comes right after the fraud at the Punjab National Bank where billionaire Nirav Modi and his firms allegedly obtained fraudulent guarantees to get short-term loans overseas.

  • The fraud raised questions regarding the failure of internal and external auditors to notice the guarantees being issued to Modi entities.

  • The PNB case was the final nail in the coffin which pushed the government to approve NFRA

- Published/Last Modified on: May 3, 2018

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