The National Financial Reporting Authority (NFRA), established on 1 October 2018 under Section 132 of the Companies Act, 2013, is an independent statutory body aimed at enhancing corporate financial accountability and protecting public and investor interests. Its creation was prompted by deficiencies in self-regulation under the Chartered Accountants Act, 1949, with recommendations from various committees and the Supreme Court emphasizing robust independent oversight. NFRA’s mandate includes setting high-quality accounting and auditing standards, monitoring compliance, and investigating professional misconduct by auditors for designated classes of companies, including listed companies, large public firms, banks, insurance companies, and certain government-referred or foreign subsidiaries. The Authority possesses powers akin to a civil court to summon documents and witnesses and can impose penalties or debar erring professionals. Guided by core values like objectivity, integrity, independence, and transparency, NFRA aims to continuously improve corporate financial reporting across all Public Interest Entities (PIEs) and ensure consistent, fair, and high-quality auditing practices.
CHAPTER – I
About NFRA
The National Financial Reporting Authority (NFRA) is a statutory body notified on 1 October 2018 under Section 132 of the Companies Act, 2013. The main objective of NFRA is to protect public interest and the interests of investors, creditors and others associated with companies or bodies corporate by establishing high-quality standards of accounting and auditing and exercising effective oversight of accounting functions performed by the companies and bodies corporate and auditing functions performed by the auditors.
1. Evolution and Background
It was experienced at various forums that the existing regulatory apparatus provided under the Chartered Accountants Act of 1949 was unable to maintain required discipline and accountability amongst Chartered Accountancy professionals due to challenges posed by self-regulation of the profession. The Standing Committee on Finance- Companies Bill 2009, while discussing the role of auditors, discussed the need for establishment of an independent audit regulator. Further, the Companies Law Committee Report, 2016, highlighted unsatisfactory oversight over the profession, prior to establishment of NFRA.
The Hon’ble Supreme Court of India vide its judgment dated February 23, 2018, in the matter of S. Sukumar vs The Secretary, Institute of Chartered Accountants of India & Ors., stated that the Union of India should consider appropriate legislation and mechanism for oversight of profession of auditors on the lines of Sarbanes-Oxley Act, 2002, and Dodd Frank Wall Street Reform and Consumer Protection Act, 2010 of USA.
Therefore, in line with the global trend of shift from self-regulatory organisations to an independent regulatory and oversight body, the Parliament, after due deliberation and on the recommendations of various expert committees, created an independent regulatory body with the establishment of NFRA in terms of Section 132 of the Companies Act, 2013.
2. Mandate and Domain
The objective of NFRA is enshrined in Rule 4 (1) of the NFRA Rules 2018, which provides that the Authority shall protect the public interest and the interests of the investors, creditors and others associated with the companies or bodies corporate governed under Rule 3 of NFRA Rules 2018 by establishing high quality standards of accounting and auditing and exercising effective oversight of accounting functions performed by the companies and bodies corporate and auditing functions performed by the auditors. Rules 7, 8 and 9 of the NFRA Rules 2018 prescribe the various powers and functions of NFRA as arising from its monitoring, review and oversight functions.
Rule 3 of NFRA Rules 2018 provides for the class of companies over which NFRA has jurisdiction. The Rule states that NFRA shall have power to monitor and enforce compliance with accounting standards and auditing standards, oversee the quality of service under Sub Section (2) of Section 132 of the Companies Act, 2013 or undertake investigation under Sub-Section (4) of such section of the auditors of the following class of companies and bodies corporate, namely: –
a) companies whose securities are listed on any stock exchange in India or outside India;
b) unlisted public companies having paid-up capital of not less than rupees five hundred crores or having annual turnover of not less than rupees one thousand crores or having, in aggregate, outstanding loans, debentures and deposits of not less than rupees five hundred crores as on the 31st March of immediately preceding financial year;
c) insurance companies, banking companies, companies engaged in the generation or supply of electricity, companies governed by any special Act for the time being in force or bodies corporate incorporated by an Act in accordance with clauses (b), (c), (d), (e) and (f) of sub-section (4) of section 1 of the Act;
d) any body corporate or company or person, or any class of bodies corporate or companies or persons, on a reference made to the Authority by the Central Government in public interest; and
e) a body corporate incorporated or registered outside India, which is a subsidiary or associate company of any company or body corporate incorporated or registered in India as referred to in clauses (a) to (d), if the income or net worth of such subsidiary or associate company exceeds twenty per cent of the consolidated income or consolidated net worth of such company or the body corporate, as the case may be, referred to in clauses (a) to (d).
3. Functions and Powers of NFRA
As per Sub Section (2) of Section 132 of the Companies Act, 2013, 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 laying down of accounting and auditing policies and standards for adoption by the 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. NFRA shall-
As per Sub Section (4) of Section 132 of the Companies Act, 2013, notwithstanding anything contained in any other law for the time being in force, 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 person, 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 (38 of 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, (5 of 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;
(c) Where professional or other misconduct is proved, 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 five 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-
I. being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or
II. performing any valuation as provided under section 247, for a minimum period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority.
Explanation— For the purposes of this 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 (38 of 1949).
4. NFRA Charter
NFRA has adopted a charter outlining its aims and commitments, which states the following:
a) The objective of the NFRA is to continuously improve the quality of all corporate financial reporting in India.
b) The quality of corporate financial reporting will be measured and evaluated essentially by its compliance with the law and the statutorily notified accounting standards and auditing standards.
c) NFRA will strive for continuous improvement of corporate financial reporting across all types of Public Interest Entities (PIEs) and across all size categories of audit firms.
5. Core Values
The core values of NFRA are as follows:
a) Objectivity – No subjective action from either members or staff, openness to all facts/views/ opinions without any pre-conceived conclusions or pre-judging any matter.
b) Integrity – Across cases/persons/firms, absence of multiple standards, uniform treatment of all those identically/similarly placed.
c) Impartiality – Discharge of its functions without fear or favour.
d) Independence – Equidistant from all stakeholders.
e) Fairness – Not imposing unfair burdens especially with the benefit of hindsight.
f) Transparency– Fair and open processes.
Figure 1: Core Values of NFRA
NFRA’s functioning will at all times be mindful of the need to promote the ease and speed of doing business and will be guided always by the overall public interest, with all its actions being strictly anchored by and lying within, its legal mandate.
6. Organisational Structure
The National Financial Reporting Authority (Manner of Appointment and other Terms and Conditions of Service of Chairperson and Members) Rules, 2018 provides that the National Financial Reporting Authority shall consist of the following persons to be appointed by the Central Government, namely: –
a) Chairperson.
b) Three Full Time Members and
c) Nine Part Time Members.
All monitoring, oversight, adjudication, and enforcement functions are performed by the Executive Body comprising the Chairperson and Full Time Members, as per Sub- Section (3B) of Section 132 of the Companies Act, 2013. However, the responsibility to make recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or class of companies or their auditors, is entrusted to the full Authority which includes the Executive Body and Part-Time Members.
Source: NFRA Annual Report 2024-25
