The Union Cabinet on 1st March 2018 approved the establishment of much awaited NATIONAL FINANCIAL REPORTING AUTHORITY. This created one post of Chairperson and three posts of Full Time Members against a provision of fifteen members in law and one Secretary for NFRA. The establishment of NFRA is as per section 132 it’s been five years since the enactment of the Companies Act, 2013 and only a few sections have yet to be notified. Most notable amongst them was the provision to create a National Financial Regulatory Authority – an audit super-regulator of sorts.
LONG WAY TRAVELLED
The concept of establishing NFRA was introduced in the draft law and endorsed by the Standing Committee on Finance – Fifteenth Lok Sabha. In its August 2010 report, the Committee approved the creation of a new body that would not only set and oversee auditing and accounting standards but also to monitor the quality of audit undertaken across the corporate sector . Later Since the same has been endorsed in another Parliamentary Committee report, by a government-appointed company law committee and by the Finance Ministry and Ministry of Corporate Affairs, across two governments.
However, the Institute of Chartered Accountants of India opposed its creation from the first day of its appearance. The reason was obvious that the powers of this self-regulatory professional body shall directly threaten by any such move. ICAI tried to impress the Government that the creation of such authority may lead to a conflict with the ICAI. However, their objections were rejected by the Parliamentary Committee in 2012. At this stage, ICAI put forward his best step and claimed that the matters of professional misconduct committed by a chartered accountant or a CA firm are first referred to the ICAI “which may refer it to NFRA for final action”. In short – ICAI should be retained as regulating authority. But that was rejected too.
The failure of ENRON resulted in the introduction of stringent self-regulation of the U.S accounting profession in 2002, a year after the Enron scam broke and prompted the legislation of the Sarbanes-Oxley Act that ushered in new corporate governance and disclosure requirements. Here, the exposure of Satyam Scam has resulted in floating the same idea to have such type of authority. The companies Act 2013 duly carried its intentions through section 132 to create such authority. However, the latest PNB scam & SC judgement over BIG 4 functioning has made it inevitable to postpone it further and the Union Government has approved its constitution finally setting aside all the ICAI objections.
ICAI GROSSLY FAILED AT STANDING COMMITTEE
ICAI made many serious attempts to derail the process of establishment of NFRA. However, they received the first blow when section 132 has become part of Companies Act 2013. As the sections of companies Act were being notified in the phased manner, ICAI was hopeful for its non-notification. After Companies Act 2013, ICAI lobbied heavily for its non-creation. The Standing Committee report, published in December 2016, devoted 8 pages to discussing the NFRA issue. It started by listing the many arguments put forth by ICAI.
The report quoted the ICAI as saying “…the CA fraternity is in the process of coping with new changes such as penalties, rotation, restricted services, Internal Financial Controls over Financial Reporting and other aspects imposed by the Companies Act. The profession would, rightly, need some more time to understand and assess the expectations of a NFRA regime which, in our view shall not be notified.”
HOWEVER, determined MCA countered ICAI by the lengthy arguments in favour of creation of NFRA.
MCA FUMED OVER NON ACTION ON 132 SUSPENDED LISTED COMPANIES
Astonishingly, the MCA noted that the ICAI has not moved even on complaints made by the Ministry. “It may also be pertinent here to draw attention to the reference in November 2015 to ICAI by MCA for examining the role of auditor and possible misconduct on their part in case of 132 listed companies whose scrips were suspended by SEBI for abnormal price rise which was not supported by the fundamentals of the companies, non-existent companies, etc. and on which even preliminary action had not been initiated by the ICAI despite several reminders.” Thus, reiterating the need for an independent audit regulator the MCA stated the NFRA would be established by the end of fiscal year 2016-17.
ICAI MOVE GOT SUPPORT
However a relief came to ICAI when Parliamentary Committee ignoring a provision enacted by Parliament itself and despite the above stated powerful submission by the MCA, the Committee concluded in its report that the existing mechanism under ICAI should be streamlined and strengthened “without needlessly adding to regulatory levels”. Though, this was an attempt to subvert the will of the Parliament. However the demoralised ICAI found it significant development and cheered its achievement.
The Standing Committee on Finance (2014-15), Sixteenth Lok Sabha in its thirteenth report on Demands of Grants (2015-16) of Ministry of Corporate Affairs has inter alia made following observation/ recommendation in the para 81:
“The Committee note that National Financing Regulatory Authority (NFRA) has been set up as an oversight body having quasi-judicial authority including suo moto investigation powers in cases of professional misconduct by a Chartered Accountant/firm of Chartered Accountants, imposition of penalty thereof, debarring members of the Institute of Chartered Accountant of India (ICAI), if proved guilty, etc. The Committee further note that the constitution of NFRA is a result of the recommendation of the Standing Committee on Finance which examined the Companies Bill, 2009 and recommended that the scope of the National Advisory Committee on Accounting Standards (NACAS) as included in the Companies Act, 1956 should be expanded not only to set and oversee auditing and accounting standards, but also to monitor the quality of audit undertaken across the corporate sector. The Committee further observe that similar oversight bodies also exist in other countries, for example, Financial Services Authority (FSA) in United Kingdom and Public Company Accounting Oversight Board (PCAOB) in United States of America. However, as issues relating to conflict of mandate with regard to disciplinary matters between the NFRA and the Act governing the Institute of Charted Accountants of India have been raised, the Committee desire that the Ministry may ensure that in the process of constituting NFRA, it does not create two parallel jurisdictions, governing the same issue. The Committee would like the NFRA to function as an oversight body without any jurisdictional conflict or overlap. This aspect may be addressed, when the rules governing NFRA are finalised by the Ministry.”
NOW NFRA IS A REALITY
Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall—
(a) Make recommendations to the Central Government on the formulation and lying down of accounting and auditing policies and standards for adoption by companies or class of companies or their auditors, as the case may be;
(b) Monitor and enforce the compliance with accounting standards and auditing standards in such manner as may be prescribed;
(c) Oversee the quality of service of the professions associated with ensuring compliance with such standards, and suggest measures required for improvement in quality of service and such other related matters as may be prescribed; and
(d) Perform such other functions relating to clauses (a), (b) and (c) as may be prescribed.
CONSTITUTION & CHAIRPERSON OF THE NFRA
The cabinet approval created one post of Chairperson and three posts of Full Time Members and one Secretary for NFRA.
The National Financial Reporting Authority shall consist of a chairperson, who shall be a person of eminence and having expertise in accountancy, auditing, finance or law to be appointed by the Central Government and such other members not exceeding fifteen consisting of part-time and full-time members as may be prescribed: Provided that the terms and conditions and the manner of appointment of the chairperson and members shall be such as may be prescribed:
Provided further that the chairperson and members shall make a declaration to the Central Government in the prescribed form regarding no conflict of interest or lack of independence in respect of his or their appointment:
Provided also that the chairperson and members, who are in full-time employment with National Financial Reporting Authority 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.
POWERS OF THE NFRA
The National Financial Reporting Authority shall—
(A) have the power to investigate, either suo motu or on a reference made to it by the Central Government, for such class of bodies corporate or persons, in such manner as may be prescribed into the matters of professional or other misconduct committed by any member or firm of chartered accountants, registered under the Chartered Accountants Act, 1949:
Provided that 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 under this section;
(B) have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely:—
(i) Discovery and production of books of account and other documents, at such place and at such time as may be specified by the National Financial Reporting Authority;
(ii) Summoning and enforcing the attendance of persons and examining them on oath;
(iii) Inspection of any books, registers and other documents of any person referred to in clause (b) at any place;
(iv) Issuing commissions for examination of witnesses or documents;
PUNISHMENTS & PENALTIES
Where professional or other misconduct is proved against any member or firm, NFRA shall have the power to make order for—
(A) Imposing penalty of—
(I) Not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and
(II) Not less than ten lakh rupees, but which may extend to ten times of the fees received, in case of firms;
(B) debarring the member or the firm from engaging himself or itself from practice as member of the Institute of Chartered Accountant of India referred to in clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 for a minimum period of six months or for such higher period not exceeding ten years as may be decided by the National Financial Reporting Authority. Explanation.—for the purposes of his sub-section, the expression “professional or other misconduct” shall have the same meaning assigned to it under section 22 of the Chartered Accountants Act, 1949.
NFRA ORDERS ARE APPEALABLE
Any person aggrieved by any order of the National Financial Reporting Authority issued under clause (c) of sub-section (4), may prefer an appeal before the Appellate Authority (Yet to be formed) constituted under sub-section (6) in such manner as may be prescribed.
(A) The Central Government may, by notification, constitute, with effect from such date as may be specified therein, an Appellate Authority consisting of a chairperson and not more than two other members, to be appointed by the Central Government, for hearing appeals arising out of the orders of the National Financial Reporting Authority.
(B) The qualifications for appointment of the chairperson and members of the Appellate Authority, the manner of selection, the terms and conditions of their service and the requirement of the supporting staff and procedure (including places of hearing the appeals, form and manner in which the appeals shall be filed) to be followed by the Appellate Authority shall be such as may be prescribed.
The head office of the National Financial Reporting Authority shall be at New Delhi and the National Financial Reporting Authority may, meet at such other places in India as it deems fit. The National Financial Reporting Authority shall meet at such times and places and shall observe such rules of procedure in regard to the transaction of business at its meetings in such manner as may be prescribed.
(A) The fee for filing the appeal shall be such as may be prescribed.
(B) The officer authorised by the Appellate Authority shall prepare in such form and at such time as may be prescribed its annual report giving a full account of its activities and forward a copy thereof to the Central Government and the Central Government shall cause the annual report to be laid before each House of Parliament.
(C) The National Financial Reporting Authority shall meet at such times and places and shall observe such rules of procedure in regard to the transaction of business at its meetings in such manner as may be prescribed.
(D) The Central Government may appoint a secretary and such other employees as it may consider necessary for the efficient performance of functions by the National Financial Reporting Authority under this Act and the terms and conditions of service of the secretary and employees shall be such as may be prescribed.
(E) The National Financial Reporting Authority shall cause to be maintained such books of account and other books in relation to its accounts in such form and in such manner as the Central Government may, in consultation with the Comptroller and Auditor-General of India prescribe.
(F) The accounts of the National Financial Reporting Authority shall be audited by the Comptroller and Auditor-General of India at such intervals as may be specified by him and such accounts as certified by the Comptroller and Auditor-General of India together with the audit report thereon shall be forwarded annually to the Central Government by the National Financial Reporting Authority.
(G) The National Financial Reporting Authority shall prepare in such form and at such time for each financial year as may be prescribed its annual report giving a full account of its activities during the financial year and forward a copy thereof to the Central Government and the Central Government shall cause the annual report and the audit report given by the Comptroller and Auditor-General of India to be laid before each House of Parliament.