It seems like it was the need of an hour to constitute National Financial Reporting Authority. Section 132 of Companies Act, 2013 deals with the constitution of NFRA. On Thursday March 1, 2018, the cabinet approved its constitution as announced by Union Finance Minister Arun Jaitley in a press meet.

But the question here is, will constitution of NFRA suffice the purpose.  After its constitution, PNB like fraud will be reduced altogether?? Let’s discuss in detail.

Summary

PNB scam acted as a powerful tool for establishing an independent Regulatory body called ‘Nation Financial Reporting Authority’ to regulate the auditing profession.

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. It has also been given the 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.

Need for establishing NFRA

The government’s decision to soon 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.

Applicability of NFRA

Listed Companies as well as large unlisted public companies

Structure of NFRA- as per section 132 of Companies Act, 2013

Roles & Responsibilities of NFRA

(a)    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, 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 n 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.

Composition of 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.

Powers of NFRA

(a) Investigation

NFRA have the power to investigate, either suo moto 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.

(b) Powers as vested in civil court

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 some matters*.

Other Powers

  • Imposing Penalty:

In case of any professional or other misconduct is proved, NFRA has the power to make order for imposing penalty of:

Category Quantum of Penalty
In case of individuals not less than one lakh rupees, but which may extend to five times of the fees received
In case of firms not less than five lakh rupees, but which may extend to ten times of the fees received
  • Suspension for a particular period of time

NFRA has also the power for debarring the member or the firm from engaging himself or itself from practice as member of the Institute of Chartered Accountant of India 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.

(c) Appellate Tribunal

If any person is aggrieved by the order of NFRA with respect to ‘Imposing penalty & Suspension for a particular period of time’ as discussed above, the aggrieved person may prefer an appeal before the Appellate Tribunal in such manner and on payment of such fee as may be prescribed.

(d) Meetings of NFRA

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.

(e) Appointment of Secretary & other employees

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.

(f) Audit of NFRA

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) Disclosure on working of NFRA

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.

The NFRA is likely to be notified in 10-15 days, a government official told BloombergQuint earlier.

‘the routine matters will continue to be seen by the ICAI (Institute of Chartered Accountants of India)’- Jaitley said. He also reiterated that NFRA is not meant to replace the ICAI as the latter will continue to handle the bulk matters.

 *Powers of Civil Court under the Code of Civil Procedure, 1908

(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;

Conclusion

Indeed, PNB scam was the main reason for constituting NFRA which was proposed in Companies Act 2013 for the establishment and enforcement of accounting and auditing standards and oversight of the work of auditors, but do you really think that by constituting NFRA, PNB like fraud will be reduced?? Let’s analyse the PNB scam:

What is the fraud about??

Two PNB employees sent unauthorized letters of undertakings (LoUs), essentially bank guarantees,to foreign branches of Indian lenders, on behalf of firms related to Nirav Modi and the Gitanjali Group. The LoUs basically told these other lenders: Lend money to Nirav Modi firms so that they can pay for their imports. If they don’t pay up , we will make good this payment. 

What’s irregular about this?? 

In the normal course, when an import goes to a bank to ask for such a guarantee, one of two things happens. One,The bank asks him for collateral before it gives a guarantee name, or a fixed deposit with the bank. Second, the bank sanctions a credit limit. That means it will evaluate the importer (just like a lender asks for your income proof and address proof before giving you a home loan) and says he is good to be given a loan for a certain amount; but no money actually changes hands. 

How Punjab National Bank fell victim to India’s biggest bank fraud?? 

In the PNB fraud case, the bank employees had sent these guarantees in the absence of credit limits and collateral security (in Modi’s case). Secondly, they didn’t make an entry in the bank’s core banking system –the software used to support  a bank’s most common transactions, which also acts as a record keeper. In some cases, they made a corresponding entry in the core banking system, but for lower amounts. 

Role of auditors

Auditors say it is difficult to capture such fraudulent transactions in the statutory audit process.“Yes, there were clear gaps in the entire internal controls, which include audit processes,” says Rakesh Nangia, managing partner, Nangia & Co. What makes the task more difficult for the auditors is that the scam was conducted in collusion with several employees. “There is a failure in the complete chain of responsibility matrix and could not have continued without collusion,” he says.

After going through the above PNB case, not only Auditors, but the entire PNB Management, banking system,  the surveillance system, internal department,  The Reserve Bank of India, employees are also responsible for this scam.  So, its not worth saying that only Auditor’s are responsible (due to which NFRA came into picture), but also many other factors are responsible. But constituting NFRA can be said as the beginning of controlling frauds like big bank  PNB fraud. Let’s hope that after NFRA, fraud will be reduced and will be detected on time.

Author: C S Ekta Maheshwari is the Author of this article and is a Practicing Company Secretary. The Author can be reached For further assistance/query, specimen of forms etc. at  pcs.ekta@gmail.com 

Disclaimer: The entire contents of this article is solely for information purpose and have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation.. It doesn’t constitute professional advice or a formal recommendation. The author has undertook utmost care to disseminate the true and correct view and doesn’t accept liability for any errors or omissions. You are kindly requested to verify & confirm the updates from the genuine sources before acting on any of the information’s provided herein above.

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14 responses to “Big Bank PNB Fraud gave Birth to NFRA”

  1. m g raman says:

    u mean the fraud was sensed 5 years before when nfra was thought of ?

  2. k.nithish kumar says:

    wonderful expanation mam, pls also explain other scams happened in india in
    detail manner like above,,thank you madam

  3. VINOD KUMAR GUPTA says:

    NFRA would tighten CA fraternity .

  4. ram babu B. Com says:

    For the scams , integrity of the bank employees is important. This kind of regulatory authorities will be of NO USE.

  5. M SRINIVASA PRASAD says:

    As mentioned in the article blaming Statutory Auditors in this case is not fair. In fact Branch Statutory Auditors could have noticed. However, the probability of noticing the same is remote as they are given only two or three days for audit by the bank managements. In the interest of the nation and tax payers money the time allotted should be at least fifteen to twenty days. This is one more step in avoiding recurrence of such frauds. Simply punishing CAs by giving less time for audit is not complete.

  6. kedarnath says:

    We better say that The govt. financed PNB to divert the funds by Nimo and Choksi. This was done purposefully by government and unearthed by present government just now so that constitution of NFRA is justified. There are various provisions made in every law but not all are implemented and committees formed. Even the Profession tax is to be refunded to the payer, but the rules are till date never framed. the government did not made provisions for this.

    This fraud of PNB and that of Vijay Mallya are not what they look on face. Infact they are mor e of some political conspiracy rather than being a sam.

  7. Mayank Mohanka, FCA says:

    Dear Author, Good Insightful Article. However, I propose that why a Regulatory Body Like NFRA only for ICAI?? Why not similar regulatory bodies for Institute of Companies Secretary of India or infact for RBI itself. Surprisingly & interestingly, very conveniently the entire burden and onus, has been shifted to our CA fraternity, as if, we were hands in gloves, in this PNB fiasco???

  8. B.R.CHANDRASEKARAN says:

    Why add a Disclaimer?. Do you fear in revealing the Truth. If Professional fear like this Government go to any extent by concealing the frauds of the Politicians and diverting the issue by blaming on the Profession.Do you think no politician involved in this scam? Definitely not. Who are they? Why they are not brought into book?

  9. SREEDHARA PARTHASARATHY says:

    WHAT IS THE MECHANISM OF SIMPLY ATTESTING THE RECORDS MADE AVAILABLE IN LFAR WITHOUT ANY RESPONSIBILITY?.

    IS IT JUST TO FEED ONE CLASS OF PROFESSIONAL TO HAVE A SHARE OF EMOLUMENTS IN THE NATIONAL EXCHEQUER?

    WHY THE AUDIT IS NECESSITY IF THE SYSTEM AUTOPOLULATE EVERYTHING AND THE SAME IS TO BE ATTESTED BY A PROFESSIONAL FOR A HUGE AMOUNT OF FEES?

  10. RAGHU KUMAR CHUND says:

    NFRA is not required in the Indian context.India should stop blindly importing western solutions for Indian problems. It hasn’t worked in the last 60-70 years it wont work in future too. Just because there is an independent accounting regulator is there in west should not prompt India to fit in their shoes. Most of the institutions which are bound to be self resilient and independent are giving ways to the political establishments. this is the order of the day and unless it is checked from all the four corners the inception of new statutes, incorporating new statutory provisions, establishment of new layers of judicial bodies is a sheer waste.

  11. Ramesh Chandak says:

    Valuable information!

  12. Sunil says:

    Welcome NFRA…but it looks strange that, to audit firms – we CA and to check and monitor CA, we now have NFRA!!. For NFRA – what’s next??!!
    The more we bring in hierarchy, more time, money and effort is lost

  13. CA. Sangam Aggarwal says:

    In my opinion NFRA is not came just because of PNB scam, the provisions of NFRA is already proposed under Companies Act, 2013.
    Govt. implemented provisions of Companies Act, 2013 in piecemeal as and when required and based upon urgency.
    So it is not correct to link with PNB scam only. In my opinion NFRA is good in which black ships in the profession will get punishment and have fear of Govt. while doing unethical things.

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