National Financial Reporting Authority - Composition, Powers, Functions, Juridictions, Benefits & Members

The Full form of NFRA is the National Financial Reporting Authority. On October 1st, 2018, the Indian government established the NFRA by section 132 (1) of the Companies Act, 2013. NFRA was established to increase investor and public confidence in companies’ financial disclosures. It is an independent regulatory body that works with the enforcement of auditing requirements and assures the quality of audits.

To score well in the UPSC IAS Exam, aspirants should be knowledgeable about major financial and economic issues. 

National Financial Reporting Authority (NFRA) constitutes an important part of the Indian Economy in General Studies Paper 3 of the UPSC Syllabus.

Recent Update

• In 2020, the Technical Advisory Committee (TAC) was established by NFRA under the Chairmanship of Professor R Narayanaswamy, IIM, Bangalore.
• It consists of a chairman, one of the TAC’s members.
• It mostly serves two purposes:
  • Support and counsel the NFRA Executive Body on the draughts of the accounting and auditing standards.
  • Contribute ideas from those who will use, prepare, and audit financial accounts.
• In 2022, Rajesh Verma, secretary of corporate affairs, recently urged at an event hosted by the National Financial Reporting Authority as part of Azadi Ka Amrit Mahotsav (AKAM) celebrations.
• He highlighted the need to strengthen NFRA to discharge its duties effectively” and “strengthen the mandates of protecting the public interests.”

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What is National Financial Reporting Authority (NFRA)?

The National Financial Reporting Authority (NFRA) is responsible for suggesting accounting and auditing standards changes under the Companies Act of 2013. It monitors the service quality provided by the accounting and auditing professions. The NFRA is authorized to investigate allegations of professional misconduct by chartered accountants or CA firms, impose penalties, and ban offenders from practising for up to ten years. If the NFRA initiates an inquiry into misconduct, no other institute or organization can proceed with investigations related to the same case. The NFRA's activities are expected to attract more domestic and foreign investments, promote economic growth, support the audit profession, and facilitate global business practices through compliance with international standards.

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The composition of NFRA

• NFRA is composed of Chairman, three full-time members, and a Secretary.
• The Central Government will occasionally select the NFRA Chairman with experience in finance, law, accounting, and auditing.
• As of 2022, Dr Ajay Bhushan Prasad Pandey is the current chairman of the NFRA. Sh. Praveen Kumar Tiwari and Ms Smita Jhingran are the other members.
• The NFRA Chairman and its members must sign a statement attesting to their complete independence and lack of any conflicts of interest about their nomination and provide it to the Central Government.
• Additionally, it is forbidden for the Chairman and members of the NFRA to work for any audit firm (including associated consultant businesses). At the same time, they are employed there for two years after their employment ends.

Members of NFRA

The NFRA consists of a Chairperson, three full-time Members, and one Secretary. The Chairperson must be an eminent individual with expertise in areas like accountancy, auditing, finance, or law, and they are appointed by the Central Government.

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Roles and Functions of the National Financial Reporting Authority (NFRA)

The roles and functions are listed below:

• For the Central Government’s approval, NFRA will recommend accounting and auditing policies and standards businesses should embrace.
• It will monitor and enforce adherence to the accounting and auditing standards.
• It will monitor the professions’ adherence to these standards and the quality of their work and make recommendations for ways to raise service quality.
• It will carry out any additional tasks or obligations required for or related to the tasks above and obligations.

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Powers of the National Financial Reporting Authority (NFRA)

The powers of NFRA are listed below-

• If professional or other wrongdoing is established, it may impose the following sanctions:
• Summoning, requiring, and interrogating individuals while they are under oath Inspection of any books, registers, and other records of any individual at any location appointing commissions to investigate witnesses or documents
• Finding and producing books of accounts and other documents at the location and time that the NFRA may specify
• ln relation to a lawsuit involving any of the following subjects, the same authority as a Civil Court under the Code of Criminal Procedure, 1908.
• Such an inquiry may be started either suo moto (on its own) or in response to a referral from the Central Government.
• Where the NFRA has started an investigation, this is the only authority that may begin or continue the case.
• To look into allegations of professional or other misbehaviour made by a certain group of accounting firms or accountants.
  • Penalty: Between Rs. 1,00,000 and 5 times the fees paid for individuals; between Rs. 5,00,000 and 10 times the fees collected for businesses;
  • Preventing the member/firm from practising as an ICAI member for a period ranging from six months to ten years, as may be determined
• Anyone dissatisfied with the NFRA’s decision may then appeal it to the Appellate Authority.

Benefits of NFRA

The following is a list of the anticipated benefits of the NFRA-

• India now qualifies for the International Forum of Independent Audit Regulators (IFIAR), which it had previously been refused. This improves both India’s standing internationally and the confidence of foreign and domestic investors.
• More domestic and international investment.
• Economic expansion
• IFIAR qualifying demonstrates our commitment to worldwide business standards, which supports globalisation even more.
• Enhancement of the auditing industry.
• The creation of NFRA will give the ICAI more resources to work on creating the sophisticated skills required in the ambiguous world of technology.

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Companies and Bodies Corporate Governed by NFRA

According to Rule 3 of the NFRA rules (2018), the Authority has the power to oversee and enforce compliance with accounting and auditing standards for certain classes of companies and bodies corporate, which include the following:

• Companies listed on any stock exchange in India or outside India.
• Unlisted public companies meet specific criteria for paid-up capital, annual turnover, outstanding loans, debentures, and deposits.
• Insurance companies, banking companies, electricity generation or supply sector companies, and companies governed by special Acts.
• Bodies corporate or companies or persons, or any class of them, referred to the Authority by the Central Government in the public interest.
• Foreign subsidiaries or associate companies of Indian companies falling under categories (a) to (d), provided their income or net worth exceeds twenty per cent of the consolidated income or net worth of the Indian company or body corporate.

Jurisdiction of National Financial Reporting Authority

• The NFRA's authority to investigate CAs and their firms under Section 132 of the Companies Act extends to large public corporations, whether listed or unlisted.
• The Central Government can designate other entities for investigation if it serves the public interest.
• The ICAI will retain a significant role concerning its members, particularly in auditing private limited companies and unlisted public companies below a specified threshold.
• ICAI will continue to provide advisory recommendations on accounting and auditing standards to the NFRA.
• The Quality Review Board (QRB) will conduct quality audits for specific categories, including public firms not listed, below the required threshold, and listed private companies designated by the NFRA.

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The exigency of the National Financial Reporting Authority (NFRA)

• Following accounting frauds, there was a need to create an independent regulator to uphold auditing standards and guarantee the quality of audits to increase investor and public confidence in corporate financial disclosures.
• NFRA was required to bolster India’s financial system and restore public confidence in Indian auditors, which recent events had damaged.
• Following the fraud at Punjab National Bank, where billionaire Nirav Modi and his companies are accused of using false guarantees to get short-term loans abroad, the government immediately declared the National Financial Reporting Authority.
• The government was finally persuaded to approve the National Financial Reporting Authority by this fraudulent case involving Rs12,636 crore at PNB.

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Future of National Financial Reporting Authority

• The NFRA, established under the Companies Act of 2013, operates under the Ministry of Corporate Affairs.
• The decision to involve the NFRA stems from the Punjab National Bank crisis, characterized by a millionaire, fraudulent guarantees, and flawed accounting practices, prompting concerns about the role of internal audits.
• The NFRA, a body empowered by the Companies Act, monitors auditing procedures and accounting standards, addressing cases of professional misconduct and playing a vital role in corporate management and financial reporting.
• Its responsibilities encompass ensuring the integrity of financial records, overseeing audits, combating fraud, promoting transparency, and ensuring financial statements are based on reliable data.
• The NFRA consists of an independent panel with three full-time members and a secretary.
• The proposed NFRA standards extend to auditors assessing a specific set of firms or subsidiaries, typically numbering less than 200, including less than 20 listed firms, companies with a net worth below 500 crores, paid-up capital below 500 crores, and annual turnover below 1000 crores as of March 31 of the fiscal year, or companies listed outside India.

Need to revisit statutory audit of MSMCs

The NFRA sought public comments on whether Micro, Small and Medium Enterprises (MSME) should be exempted from mandatory statutory audits.

ICAI vs NFRA

ICAI	NFRA
ICAI stands for Institute of Chartered Accountants of India. It was established on 1 July 1949 ICAI is a statutory body for managing the profession of chartered accountancy in India and is under the administrative control over the ministry of corporate affairs.	The full form of NFRA is National Financial Reporting Authority It was established on 1 October 2018 NFRA was set up under the Companies Act. It is an independent regulatory body that works with the enforcement of auditing requirements and assures the quality of audits.

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Conclusion

The ICAI will therefore continue to have regulatory authority over private corporations and publicly traded unlisted companies that fall below the aforementioned criteria. Additionally, as directed by the NFRA, the Quality Review Board will continue to perform quality audits of private limited firms, unlisted public corporations, and other companies.

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