What are the Functions, Duties, and Powers of NFRA (National Financial Reporting Authority)

Table of Contents:

1. Summary
2. Functions & Duties of NFRA
   • Recommending Accounting Standards and Auditing Standards
   • Advisory Committees, Study Groups, and Task Forces
   • Financial Reporting Advocacy and Education
   • International Associations and International Assistance
   • Confidential and Security of Information
   • Avoidance of Conflict of Interest
3. Powers of NFRA [Section 132(4)]

1. Summary

The functions, duties, and powers of NFRA may be broadly classified as:

(a) Advisory or non-enforcement; and

(b) Enforcement monitoring, investigation, and enforcement.

The advisory or non-enforcement role/functions of NFRA are:

• • recommend accounting standards and auditing standards for approval by the Central Government
  • promote awareness in relation to the compliance of accounting standards and auditing standards;

The enforcement functions/roles/powers for NFRA are as under:

• • maintain details of particulars of auditors appointed in the companies and bodies corporate governed by NFRA [See rule 3]; See Chapter 3 of Taxmann’s Law Relating to NFRA/Audit & Auditors
  • monitor and enforce compliance with accounting standards and auditing standards [See Rules 7 and 8]; [See Chapters 7, 8, and 10 supra]
  • oversee the quality of service of the professions associated with ensuring compliance with such standards and suggest measures for improvement in the quality of service [See Rule 9]; [See Chapter 9 supra]
  • co-operate with national and international organizations of independent audit regulators in establishing and overseeing adherence to accounting standards and auditing standards; and
  • investigate[See Rule 10] into the matters of professional or other misconduct committed by auditors of companies and bodies corporate governed by NFRA [See Chapter 10 supra]
  • disciplinary proceedings and imposing a penalty or debarring such auditors when professional or other misconduct by them is proven [Rule 11; Section 132(4)(c)] [See Chapter 10 supra]

The enforcement functions and powers of NFRA are exercisable by it only in respect of companies and bodies corporate governed by it and auditors of such companies and bodies corporate [See Chapter 3 supra].

2. Functions & Duties of NFRA

Section 132(2) of the Act provides that 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 [See Rule 4(1) & Rule 6];

(b) monitor and enforce the compliance with accounting standards and auditing standards in such manner as may be prescribed[See Rule 7 & Rule 8];

(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 services and such other related matters as may be prescribed [See Rule 9]; and

(d) perform such other functions relating to (a), (b) and (c) above as may be prescribed [See Rules 6 to 9].

The MCA has notified the National Financial Reporting Authority Rules, 2018 (NFRA Rules, 2018) vide Notification No. GSR 111(E) dated 13-11-2018. The NFRA Rules, 2018 come into force with effect from the date of publication in e-gazette i.e., with effect from 14-11-2018. Rule 4 of these Rules prescribes the Functions and Duties of NFRA.

Rule 4(1) provides that the Authority (NFRA) shall protect:

• • the public interests; and
  • the interests of investors, creditors, and others associated with the companies governed by NFRA (See Rule 3) by:
    • establishing high-quality standards of accounting and auditing and
    • exercising effective oversight of
      • accounting functions performed by the companies and bodies corporate and
      • auditing functions performed by auditors.

Rule 4(2) provides that in particular, and without prejudice to the generality of the foregoing, the Authority shall:—

(a) maintain details of particulars of auditors appointed in the companies and bodies corporate governed by NFRA [See rule 3] See Chapter 3 of Taxmann’s Law Relating to NFRA/Audit & Auditors;

(b) recommend accounting standards and auditing standards for approval by the Central Government [See Rule 6];

(c) monitor and enforce compliance with accounting standards and auditing standards [See Rules 7 and 8] [See Chapters 7, 8, and 10 supra];

(d) oversee the quality of service of the professions associated with ensuring compliance with such standards and suggest measures for improvement in the quality of service [See Rule 9] [See Chapter 9 supra];

Note: Rules 6, 7, 8, and 9 contain detailed provisions as to how functions in (b), (c), and (d) are to be performed by NFRA;

(e) promote awareness in relation to the compliance of accounting standards and auditing standards;

(f) co-operate with national and international organizations of independent audit regulators in establishing and overseeing adherence to accounting standards and auditing standards; and

(g) perform such other functions and duties as may be necessary or incidental to the aforesaid functions and duties.

Rule 16 of the NFRA Rules, 2018 deals with NFRA’s duties as regards financial reporting advocacy and education. Rule 17 deals with NFRA’s obligations as regards maintaining confidentiality and security of information. Rule 18 deals with NFRA’s obligations regarding conflict of interest.

Rule 4(3) empowers the Central Government to delegate any of its powers or functions under the Act, other than the power to make rules, to the NFRA. Rule 4(3) provides that the Central Government may, by notification, and subject to such conditions, limitations and restrictions as may be specified therein delegate any of its powers or functions under the Act, other than the power to make rules, to the NFRA.

2.1 Recommending Accounting Standards and Auditing Standards

Rule 6 of the NFRA Rules, 2018 deals with recommending accounting standards and auditing standards. Rule 6(1) provides that for the purpose of recommending accounting standards or auditing standards for approval by the Central Government, the NFRA—

(a) 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;

(b) may seek additional information from the Institute of Char­tered Accountants of India on the recommendations received under (a) above, if required.

The NFRA shall consider the recommendations and additional information in such manner as it deems fit before making recommendations to the Central Government.

2.2 Advisory Committees, Study Groups, and Task Forces

Rule 15 of the NFRA Rules, 2018 provides that for the effective performance of its functions under the Act, the NFRA may constitute advisory committees, study groups and task forces.

2.3 Financial Reporting Advocacy and Education

Rule 16 of the NFRA Rules, 2018 provides that the NFRA shall take suitable measures for the promotion of awareness and significance of accounting standards, auditing standards, auditors’ responsibilities, audit quality and such other matters through education, training, seminars, workshops, conferences and publicity.

2.4 International Associations and International Assistance

Rule 19 of the NFRA Rules, 2018 provides that:

• • The NFRA may become a member of regional or international associations of independent audit regulators and standard-set­ters on such terms as it deems fit.
  • The NFRA may provide assistance to, or receive assistance from, foreign independent audit regulators in the investigation of an auditor in accordance with Indian laws on such terms as it deems fit.

2.5 Confidentiality and Security of Information

Rule 17 of the NFRA Rules, 2018 provides as under:

• • The NFRA and all persons and organizations associated with it shall maintain complete confidentiality and security of the information provided to them for the purpose of the work of the Authority.
  • The NFRA may enter into such contractual arrangements as may be necessary in order to maintain complete confidentiality and security of the information.

2.6 Avoidance of Conflict of Interest

Rule 18 of the NFRA Rules, 2018 provides as under:

• • The NFRA shall not enter into any contract, arrangement, or relationship or participate in any event that may, or is likely to be perceived to, interfere with its ability to perform its func­tions and duties in an effective, fair and reasonable manner.
  • In particular, the NFRA or any person associated with it shall not receive any funds, assets, donations, favours, gifts or spon­sorships from any source other than the Central Government and shall not enter into any liabilities, obligations or commit­ments except as permitted by the Central Government.

3. Powers of NFRA [Section 132(4)]

Sub-section (4) of section 132 provides that notwithstanding anything contained in any other law for the time being in force, the NFRA shall—

(a) have the power to investigate [See Rule 10] into the matters of professional or other misconduct committed by any member or firm of chartered accountants:

• • • either suo motu or on a reference made to it by the Cen­tral Government,
    • for such class of bodies corporate or persons [See Para 3.1],
    • in such manner as may be prescribed.

Note: Rule 10 of NFRA Rules, 2018 contain provisions are regards the power of NFRA to investigate matters of profes­sional or other misconduct

(b) have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of specified matters

(c) where professional or other misconduct is proved, have the power to make order for—

(A) imposing penalty of—

(I) not less than one lakh rupees, but which may extend to five times of the fees received, in case of indivi­duals; and

(I) not less than Five lakh rupees, but which may extend to ten times of the fees received, in case of firms;

(B) debarring the member or the firm from engaging him­self or itself from practice as member of the Institute of Chartered Accountants of India referred to in clause (e) of sub-section (1) of section 2 of the Chartered Accoun­tants Act, 1949 (38 of 1949) for a minimum period of six months or for such higher period not exceeding ten years as may be decided by the National Financial Reporting Authority.

The powers of NFRA in sub-clause (B) of clause (c) of sub-section (4) of section 132 are very wide so as to debars a member of ICAI or Audit from practice for 6 months to 10 years as may be decided by NFRA.

NFRA’s jurisdiction is limited to companies and as such its powers to debars a CA or CA firm should be limited to audits or assignments in relation to companies and certain bodies corporate. Therefore, section 20 of the Companies (Amendment) Act, 2019 substitutes sub-clause (B) of clause (c) of section 132(4). The new substituted sub-clause (B) reads as under:

“(B) debarring the member of the firm from—

I. being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or

II. performing any valuation as provided under section 247, for a minimum period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority.”

The above amendment shall come into force from a date to be notified.

On and from the date the new sub-clause (B) comes into force, NFRA cannot debar any CA or CA firm from practice. NFRA can only debar CA or CA firm from audits, and internal audits of companies and bodies corporates and from performing valuation services under section 247 of the Act.

The expression “professional or other misconduct” shall have the same meaning assigned to it under section 22 of the Chartered Accountants Act, 1949. (See Chapter 10 Taxmann’s Law Relating to NFRA/Audit & Auditors)

The above provisions shall apply notwithstanding anything contained in any law for the time being in force.

Rule 11 of the NFRA Rules, 2018 contains the detailed procedure for disciplinary proceedings against members of ICAI or CA Firms. Rule 12 deals with the manner of enforcement of orders passed in disciplinary proceedings [See Chapter 10 supra]