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.
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
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*.
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|
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;
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 firstname.lastname@example.org
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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