Legal Framework: Section 132 of the Companies Act, 2013 (“the Act”) enables the Central Government (hereinafter referred as “CG”) to constitute a National Financial Reporting Authority (NFRA). As per section 132 (1), the CG may, by notification, constitute a NFRA to provide for matters relating to accounting and auditing standards under the Companies Act, 2013.
Pursuant to this provision, the Union Cabinet has approved the proposal of establishing NFRA on Thursday, 1st March 2018.
Constitution of NFRA: The NFRA shall consist of one Chairperson, three full-time members and one Secretary. The Standing Committee on Finance had also recommended establishment of NFRA in its 21st report. This NFRA will act as an independent regulator for the auditing profession.
NFRA will act as watchdog for Auditors: The Union Cabinet has specified the class of bodies corporate or persons for which the NFRA shall investigate into the matters of professional misconduct by Chartered Accountants and their firm. The jurisdiction of NFRA for investigation of Chartered Accountants and their firm would extend to listed companies and large unlisted public companies. The threshold for large unlisted companies shall be prescribed by the CG when in the related rules. The CG can also refer such other entities for investigation where public interest would be involved.
Penalty and appeal: The NFRA has power to impose penalty on CAs and auditing firms if professional misconduct is proved. It can impose penalty upto five times of fees received, subject to minimum limit of Rs. 1, 00,000, in case of individuals and upto ten times of fees received, subject to minimum limit of Rs. 5, 00,000, in case of firms. It may debar the CA or auditing firm from practice as a member of the ICAI for a minimum period of 6 months, which can be extended to 10 years. Any person or firm aggrieved by the order of the NFRA may file an appeal before the Appellate Tribunal.