The Ministry of Corporate Affairs has officially defined the jurisdiction, powers, function, and responsibilities of the National Financial Reporting Authority (NFRA) through established rules. The creation of NFRA was proposed in the Companies Act of 2013. As an independent regulator for the auditing profession, the aim of envisioning and bringing to life NFRA is to plug loopholes and enhance regulatory supervision over chartered accountants. The Union Cabinet gave its approval for NFRA’s establishment on March 1, 2018.
Background and Need for NFRA
In light of recent accounting scandals, the need to establish an independent regulatory body, such as NFRA, became acute. Section 132 of the Companies Act 2013 empowers the central government to institute such an authority. A Parliamentary Standing Committee also suggested the institutionalization of the National Advisory Committee on Accounting Standards by forming an NFRA.
Current Scenario: ICAI as the Auditing Regulator
The current regulator of auditing is the Institute of Chartered Accountants of India (ICAI). It functions in an advisory capacity concerning accounting and auditing standards and policies. However, the establishment of NFRA indicates a certain lack of faith in ICAI’s ability to effectively address malpractices within the accounting and auditing field. ICAI has voiced its opposition towards NFRA’s setup and believes that the power of investigation should not be handed over to NFRA, arguing that having multiple regulators will not benefit the industry.
About the Institute of Chartered Accountants of India (ICAI)
ICAI is a statutory body constituted under The Chartered Accountants Act, 1949. It operates under the administrative control of the Ministry of Corporate Affairs, and its primary aim is to regulate the profession of Chartered Accountancy in India.
Key Responsibilities of NFRA
NFRA’s main remit is to monitor the service quality and undertake investigations of auditors attached to both listed entities and unlisted entities that meet certain financial criteria. While ICAI will continue to have jurisdiction over small listed companies, NFRA is tasked with supervisory responsibility over auditors of banks, insurers, electricity firms, and other corporates as referred to by the government.
Auditor Investigation and Disciplinary Proceedings
NFRA has the power to carry out investigations into professional misconduct by chartered accountants or their firms, either on its own (suo moto) or when instructed by the Central Government. Penalties can be imposed and offending chartered accountants or firms can be barred for up to a decade.
| Roles of NFRA | |
|---|---|
| 1 | Recommend policies and standards on accounting and auditing to the Central Government. |
| 2 | Enforce compliance with accounting standards and auditing standards. |
| 3 | Oversee professions associated with compliance, suggesting required improvements. |
Composition of NFRA
The National Financial Reporting Authority consists of up to fifteen members who serve part-time or full-time. The chairperson and full-time members cannot have any association with any audit firm while they serve with NFRA, as well as for two years after their appointment ends.
Benefits of Establishing the NFRA
Setting up NFRA enables India to join the International Forum of Independent Audit Regulators (IFIAR), strengthening investor confidence and fostering economic growth. The creation of NFRA also allows the ICAI to focus on developing new and complex skills needed in a technology-driven world.
The Way Forward for NFRA
NFRA faces a significant challenge in devising structures and processes capable of effectively delivering on its core functions of standards setting, professional development, quality monitoring, and discipline enforcement. It’s also critical for NFRA’s effectiveness that it maintains its distance from ICAI to avoid any regulatory capture. Independent experts with an impeccable record of integrity should make up the NFRA team. It should also consider examining company secretaries, governed by the Institute of Company Secretaries of India (ICSI), as their role in checking compliance is equally crucial. Despite differences, both NFRA and ICAI have exclusive jurisdictions and should coexist constructively, capitalizing on mutual synergies and complementarities for the betterment of the accounting and auditing industry.
