NFRA, A New Regulator for Accounting & Auditing Standards
The Central Government constituted a new body 'The National Financial Reporting Authority (NFRA)' under the provisions of Section 132 of the Companies Act, 2013, with this move ministry introduced a New independent body to monitor and enforce compliance of Accounting Standards and Auditing Standards, and to oversee the quality of service of the professions associated with ensuring compliance.
There are two basic objective of central government behind constitution of NFRA :
1. Independent Authority: NFRA is an independent regulatory body to oversight the absolute enforcement of accounting and audit laws.
2. Transparency in Reporting: NFRA will Oversee the quality of financial reporting of corporate entities to improve transparency of financial information in such reporting.
NFRA and Accounting and Auditing Standards
The Companies Act, 2013 provides some powers to the Authority (NFRA), as per sub section 2 of section 132 "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 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.
Recommending accounting standards and auditing standards.
(1) For the purpose of recommending accounting standards or auditing standards for approval by the Central Government, The NFRA shall receive recommendations from the Institute of Chartered Accountants of India on proposals for new accounting standards or auditing standards or for amendments to existing accounting standards or auditing standards. The NFRA may seek additional information from the Institute of Chartered Accountants of India on the recommendations received, if required.
(2) The Authority shall consider the recommendations and additional information in such manner as it deems fit before making recommendations to the Central Government.
ICAI will continue with its advisory role on accounting and auditing standards and will make their recommendations for formulation of accounting and auditing standards and policies to the authority.
Monitoring and enforcing compliance with accounting standards.
(1) For the purpose of monitoring and enforcing compliance with accounting standards under the Act by a company or a body corporate governed under rule 3 of NFRA Rules 2018, the Authority may review the financial statements of such company or body corporate, as the case may be, and if so required, direct such company or body corporate or its auditor by a written notice, to provide further information or explanation or any relevant documents relating to such company or body corporate, within such reasonable time as may be specified in the notice.
(2) The Authority may require the personal presence of the officers of the company or body corporate and its auditor for seeking additional information or explanation in connection with the review of the financial statements of such company or body corporate.
(3) The Authority shall publish its findings relating to non-complainces on its website and in such other manner as it considers fit, unless it has reasons not to do so in the public interest and it records the reasons in writing.
(4) Where the Authority finds or has reason to believe that any accounting standard has or may have been violated, it may decide on the further course of investigation or enforcement action through its concerned Division.
Monitoring and enforcing compliance with auditing standards.
(1) For the purpose of monitoring and enforcing compliance with auditing standards under the Act by a company or a body corporate governed under rule 3 of NFRA Rules 2018, the Authority may: –
(a) review working papers (including audit plan and other audit documents) and communications related to the audit;
(b) evaluate the sufficiency of the quality control system of the auditor and the manner of documentation of the system by the auditor; and
(c) perform such other testing of the audit, supervisory, and quality control procedures of the auditor as may be considered necessary or appropriate.
(2) The Authority may require an auditor to report on its governance practices and internal processes designed to promote audit quality, protect its reputation and reduce risks including risk of failure of the auditor and may take such action on the report as may be necessary.
(3) The Authority may seek additional information or may require the personal presence of the auditor for seeking additional information or explanation in connection with the conduct of an audit.
(4) The Authority shall perform its monitoring and enforcement activities through its officers or experts with sufficient experience in audit of the relevant industry.
(5) The Authority shall publish its findings relating to non-complainces on its website and in such other manner as it considers fit, unless it has reasons not to do so in the public interest and it records the reasons in writing.
(6) The Authority shall not publish proprietary or confidential information, unless it has reasons to do so in the public interest and it records the reasons in writing.
(7) The Authority may send a separate report containing proprietary or confidential information to the Central Government for its information.
(8) Where the Authority finds or has reason to believe that any law or professional or other standard has or may have been violated by an auditor, it may decide on the further course of investigation or enforcement action through its concerned Division.
Overseeing the quality of service and suggesting measures for improvement.
(1) On the basis of its review, the Authority may direct an auditor to take measures for improvement of audit quality including changes in their audit processes, quality control, and audit reports and specify a detailed plan with time-limits.
(2) It shall be the duty of the auditor to make the required improvements and send a report to the Authority explaining how it has complied with the directions made by the Authority.
(3) The Authority shall monitor the improvements made by the auditor and take such action as it deems fit depending on the progress made by the auditor.
(4) The Authority may refer cases with regard to overseeing the quality of service of auditors of companies or bodies corporate referred to in rule 3 to the Quality Review Board constituted under the Chartered Accountants Act, 1949 (38 of 1949) or call for any report or information in respect of such auditors or companies or bodies corporate from such Board as it may deem appropriate.
(5) The Authority may take the assistance of experts for its oversight and monitoring activities.
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