NFRA is the national regulator for the audit sector and is a part of Ministry of Corporate Affairs. It has taken over all the powers of Institute of Chartered Accountants of India (ICAI) regarding regulation of auditors.
Previously, the auditors were regulated in a self-regulatory manner under ICAI. But in 2016, the Company Law Committee recommended the creation of NFRA. But debate about its role delayed its formation till October 2018.
What is the value of NFRA in the current context?
The financial sector of the country is witnessing near failure of several financial entities due to frauds and irregularities at the operational level. Here, in many cases, the auditors were not able to efficiently monitor and audit operations of the entities they audit. Creation of a government owned regulator will make the big auditors more responsible and efficeint.
Recent financial frauds demanded an independent regulator
The fraud at Punjab National Bank due to operational failure and inability of the auditors to discover the irregularities strengthened the idea of an independent regulator. Government moved ahead to create an independent oversight mechanism in the auditing profession and the Cabinet notified the NFRA on March 21, 2018. National Financial Reporting Authority (NFRA) was constituted on 1st October,2018 by the Government.
Creation of an independent oversight body in the form of NFRA has also helped India closer to the global audit regulation standards. For several countries, auditors are regulated by independent regulator.
Functions and powers of NFRA
- Recommend accounting and auditing policies and standards to be adopted by companies;
- Monitor and enforce compliance with accounting standards and auditing standards.
- Under the Companies Act, 2013, the Financial Reporting Authority is empowered to oversee the quality of audit service and undertake investigation of companies whose securities are listed on any stock exchange in India or abroad.
The NFRA can probe unlisted public companies having paid-up capital of no less than Rs 500 crore or annual turnover of no less than Rs 1,000 crore. IT has the power to investigate professional misconduct by members of the ICAI.
|Why a government created entity is needed for auditing sector rather than a self-regulation?
In recent years, several frauds occurred in the financial sector. Leading one were the Punjab National Bank fraud (Nirav Modi), IL&FS financial irregularities, Punjab and Maharashtra Bank irregularities etc. In all these cases, the auditors were not able to find the operational failures within the financial institution.
Another factor is that the ICAI that was the previous entity is a self-regulatory body and hence it had conflict of interest in administering strong regulation.
Hence, an independent regulator is necessary.
The NFRA can issue an order imposing monetary penalty and can debar an individual member or firm registered with the ICAI for six months to 10 years, for professional or any other misconduct.
In the near future, the NFRA is also expected to make annual scrutiny of specific stressed companies. With the formation of NFRA, ICAI would continue to regulate the auditors of public companies below a certain threshold as well as private companies.
At present, the NFRA has two executive directors, one full-time member and a secretary. It has a consultant in its board as well. Representation will be given to Institute of Chartered Accountants of India.
The NFRA has asked the country’s top audit firms to submit details of clients and the audit details of all clients and the audit findings related to them.
The biggest audit firms in the country have been told to submit details about the audit processes, the member of clients, details of fees, the non-audit work dine for these clients, details of audit qualifications on financial accounts. Auditors have to make their response in 90 days.
NFRA regulations now cover around 90% of all the listed and unlisted companies and firms. The exercise is aimed to form stricter regulations addressing risks in audit profession.
The focus of the new set of regulations by NFRA is to create sound and stricter regulations so that there is no conflict of interest for auditors and to ensure that the auditors remain independent while doing their audit functions.
Failure of auditors in the case of IL&FS associate firm – IFIN, Punjab and Maharashtra Bank, ITNL etc raises questions about the auditor functions. NFRA stated that the Deloitte Haskins & Sells, which audited the books of IL&FS Financial Services Limited (IFIN), had failed to comply with the relevant accounting standards.