What is National Financial Reporting Authority?

What is it?

  • The Union Cabinet on March 1 approved the creation of a National Financial Reporting Authority (NFRA), a big step forward in regulating the financial audit of large companies. The NFRA is to be an independent regulator overseeing the auditing profession, and its creation was first recommended by the Standing Committee on Finance in its 21st report.
  • The Cabinet also approved the creation of the posts within the regulator — that of a chairman, three full-time members, and one secretary — though no decision has yet been taken on who will fill these posts.

How did it come about?

  • While many provisions of the Companies Act, 2013 came into force on April 1, 2014, the setting up of the NFRA, a key recommendation, was delayed. The decision appears to have been prompted by the latest bank scam to have hit the headlines — the ₹12,636 crore Punjab National Bank fraud that went undetected by auditors. The Institute of Chartered Accountants of India (ICAI) had initially voiced its discontent with the idea of a regulator for the sector, saying the existing structure was adequate. The government has clarified that the roles of the new regulator and those of the ICAI will not overlap.
  • While announcing the decision to create the body, Finance Minister Arun Jaitley said the NFRA would cover all listed companies and large unlisted companies, the benchmark size for which would be set down in the rules. Smaller unlisted companies would continue to be audited by the ICAI, he said, adding that the Centre could also refer other entities for investigation “where public interest would be involved.”
  • The government also said the Quality Review Board (QRB) would continue quality audits for private limited companies, and public unlisted companies below the prescribed threshold. The NFRA would also have the power to refer cases to the QRB as and when it decided to do so. The government said the ICAI would continue to play its advisory role with respect to accounting and auditing standards and policies by making its recommendations to the NFRA.

Why does it matter?

  • The government is quite clear that the need for such a body is all the more important after several financial accounting scams, the most recent of which was the Punjab National Bank scam. However, the idea for an NFRA came following the Satyam scam in 2009, following which the Standing Committee on Finance recommended the creation of an audit regulator. Most of the major economies of the world have independent audit regulators, and over the last decade or so, umbrella bodies have come up that have provided an element of cohesion to these regulators. The International Forum of Independent Audit Regulators (IFIAR) was set up in 2006, and now it has more than 52 independent audit regulators worldwide as members.
  • While the ICAI has voiced its reservations about an independent regulator, several individual accountants have said such a regulator is a good idea. “The audit profession had become very complacent in the idea that there would be no oversight,” one accountant told The Hindu on condition of anonymity. “This is not to say that there is always wrongdoing, but a lot of the bending of the rules that used to happen will now hopefully become more difficult.”

What lies ahead?

  • Apart from setting the rules and regulations governing the audit sector, the NFRA will have the power to debar erring auditors or audit firm for up to 10 years and impose significant fines on them.
  • According to Section 132 of the Companies Act, 2013, the NFRA will have powers to impose a fine of not less than ₹1 lakh, but the amount can extend up to five times of the fees received in case of individuals. The government has to set the rules that will stipulate the jurisdiction of the NFRA. Specifically, it has to set a limit on the size of an unlisted company that comes under the purview of the NFRA.

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