The NFRA (Part3/3): Investigation Powers and Manner of Disciplinary Proceedings
The National Financial Reporting Authority (NFRA) (Part3/3): Investigation Powers and Manner of Disciplinary Proceedings
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.
Read here more about :
NFRA, A New Regulator for Accounting & Auditing Standards (Part1/3)
The National Financial Reporting Authority (NFRA) : Applicability, Functions and Duties (Part2/3)
Central Government authorized NFRA to investigate professional misconducts and to initiate Disciplinary proceedings and take take actions permissible. In this article we will discuss about the NFRA’s powers to investigation and Disciplinary proceedings.
NFRA’s Power to investigate.
1. Where the Authority has-
Received any reference from the Central Government for investigation into any matter of professional or other misconduct under sub-section (4) of section 132 of the Act;
Decided to undertake investigation into any matter on the basis of its compliance or oversight activities;
Decided to undertake suo motu investigation into any matter of professional or other misconduct, after recording reasons in writing for this purpose, it shall forward the matter to its Division dealing with enforcement for carrying out investigation and other action.
2. If, during the investigation, the Authority has evidence to believe that any company or body corporate has not complied with the requirements under the Act or rules which involves or may involve fraud amounting to rupees one crore or more, it shall report its findings to the Central Government.
Role of Other Institutions after commencement of these rules-
The action in respect of cases of professional or other misconduct against auditors of companies referred to in rule 3 shall be initiated by Authority and no other institute or body shall initiate any such proceedings against such auditors: Provided that no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the Authority has initiated an investigation under this rule;
The action in respect of cases of professional or other misconduct against auditors of companies or bodies corporate other than those referred to in rule 3 shall continue to be proceeded with by the Institute of Chartered Accountants of India as per provisions of the Chartered Accountants Act, 1949 and the regulations made thereunder.
Disciplinary proceedings.
Based on the reference received from the Central Government or findings of its monitoring or enforcement or oversight activities, or on the basis of material otherwise available on record, if the Authority believes that sufficient cause exists to take actions permissible under sub-section (4) of section 132, it shall refer the matter to the concerned division, which shall cause a show-cause notice to be issued to the auditor.
The show-cause notice shall be in writing, and shall, inter alia, state-
The provisions of the Act or rules under which it has been issued;
The details of the alleged facts;
The details of the evidence in support of the alleged facts;
The provisions of the Act, rules or the accounting standards or auditing standards thereunder allegedly violated, or the manner in which the public interest is allegedly affected;
The actions that the Authority proposes to take or the directions it proposes to issue if the allegations are established;
The time limit and the manner in which the auditor is required to respond to the show-cause notice;
The consequences of failure to respond to the show-cause notice; and
The procedure to be followed for disposal of the show-cause notice.
3. The show-cause notice shall enclose copies of documents relied upon and extracts of relevant portions from the report of investigation or other records.
4. The show-cause notice shall be served on the auditor in the following manner, namely -
(a) By sending it to the auditor at the address provided by him or provided by the Institute of Chartered Accountants of India
(if required by the Authority) by registered post with acknowledgement due; or
(b) By an appropriate electronic means to the email address of the auditor provided by him or it or provided by the the Institute of Chartered Accountants of India (if required by the Authority):
Provided that where the auditor is a firm -
(a) A notice to a firm shall be deemed to be a notice to all the partners or employees of that firm as on the date of service of notice;
(b) The notice shall call upon the firm to disclose the name or names of the partner or partners concerned who shall be responsible for answering the allegations;
(c) The partner whose name is disclosed by the firm shall be responsible for answering the notice against the firm, and if no partner, whether erstwhile or present, of the firm owns responsibility for the allegations made against the firm, then the firm as a whole shall be responsible for answering the allegations, and all the partners and employees of that firm as on the date of occurrence of alleged misconduct, shall be responsible for answering the allegations.
5. The Division shall dispose of the show-cause notice within a period of ninety days of the assignment through a summary procedure as may be specified by the Authority, by a reasoned order in adherence to the principles of natural justice including where necessary or appropriate an opportunity of being heard in person, and after considering the submissions, if any, made by the auditor, the relevant facts and circumstances, and the material on record.
6. The order disposing of a show-cause notice may provide for-
(a) no action;
(b) caution;
(c) action for imposing penalty against auditor under sub-clause (A) of clause (c) of sub-section (4) of section 132 or for debarring the auditor from engaging as such under sub-clause (B) of clause (c) of sub-section (4) of section 132 or both.
7. The order passed under sub-rule (6) shall not become effective until thirty days have elapsed from the date of issue of the order unless the Division states otherwise in the order along with the reason for the same.
8. The order passed under sub-rule (6) shall be served on the auditor in the manner specified in sub-rule (3) and a copy of the same shall be sent
(i) in all cases to - (a) the Central Government; and (b) the Institute of Chartered Accountants of India;
(ii) in the case of a company referred to in sub-section (5) of section 139 to the Comptroller and Auditor General of India;
(iii) in the case of a listed company to the Securities and Exchange Board of India; (iv) in the case of a bank or a non-banking finance company to the Reserve Bank of India;
(iv) in the case of a bank or a non-banking finance company to the Reserve Bank of India;
(v) in the case of an insurance company to the Insurance Regulatory and Development Authority of India;
(vi) in case the auditor is resident outside India to concerned regulator of such country; and the same shall be published on the website of the Authority.
Manner of enforcement of orders passed in disciplinary proceedings.
(1) Where the order passed under rule 11 relates to imposition of a monetary penalty on any auditor, the auditor shall deposit the amount of penalty with the Authority within thirty days of the order:
Provided that where the auditor prefers an appeal against the order of the Authority, it shall deposit ten per cent. of the amount of the monetary penalty with the Appellate Tribunal.
(2) If, within thirty days of the order passed under rule 11, the auditor neither pays the penalty nor appeals against the order, the Authority shall, without prejudice to any other action, inform about such non-compliance to every company or body corporate (including those not covered by rule 3) in which the auditor is functioning as auditor and every such company or body corporate shall appoint a new auditor in accordance with the provisions of the Act.
(3) Where the order passed under rule 11 imposes a penalty on the auditor or debars the auditor from practice, the order shall be sent to every company or body corporate in which the auditor is functioning as auditor.
(4) Where the order passed under rule 11 debars the auditor from practice or the order under sub-rule (2) is passed, the order shall be sent to every company or body corporate (including those not covered by rule 3) in which the auditor is functioning as auditor and every such company or body corporate shall appoint a new auditor in accordance with the provisions of the Act.
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