National Financial Reporting Authority
The National Financial Reporting Authority is being set up at a time when the functioning of auditors is being challenged in the light of consecutive big corporate scams. Its creation was first envisaged under the Companies Act, 2013 but was not implemented. The Punjab National Bank scam has given rise to the need of the hour to set up this regulator.
Characteristics of the Authority
The key characteristics of this authority are as follows:
- It is to be an independent regulator of the auditing profession. It has been given sweeping powers to take action against erring auditors and auditing firms.
- By this, it will replace the Institute of Chartered Accountants of India (ICAI) in terms of control over erring chartered accountants.
- It has jurisdiction over both listed companies and large unlisted public companies. The limits for it will be provided by the Rules governing its function.
- The NFRA has been specifically given powers to investigate any professional misconduct by the CAs or CA firms. It can also impose penalty and debar any such entity upto a period of 10 years. But its power is limited after crossing of a particular threshold. Below that the ICAI will continue to regulate the activities of its members especially with respect to private companies and public unlisted companies. It must receive recommendations on accounting and auditing and policy standards from ICAI from time to time.
- It will also substitute the function of the Quality Review Board with respect to quality audit. However, below the matters below the threshold will be looked after by the QRB. The NFRA has the power to delegate some companies to the QRB.
Need of the NFRA
The creation of the NFRA has come about after a recent suggestion by the Supreme Court to amend the existing law for bringing an independent regulatory regime for auditing services. It had cited the example of the Sarbanese Oxley Act of US. In the light of this suggestion, Centre constituted a Committee of Experts for analysis of the functioning of the Multi-national Accounting Firms (MAFs) in India. In the CPIL case the Court had held that the existing policy frameworks and statutory provisions are being violated by the MAFs.
The government has stated that the creation of NFRA will improve foreign and domestic investments, enhance economic growth, meet international business standards and will ultimately help in bringing discipline in the auditing profession, the most important watchdog for economic frauds. The success in fulfilling these goals will be visible only once the NFRA starts functioning.