Section 132 of the Companies Act, 2013, provisions the existence of NFRA and validates its functioning since 2018. Through this regulatory body, the Central bank aims to make an independent body that assists in formulating and enforcing legislation around accounting and auditing.
The NFRA also acts as a protective body that improves investor and public confidence during financial reporting. Experts believe that this authority is aimed at reducing incidences of fraudulent activities in the financial sector. NFRA’s roles and responsibilities are advisory, non-enforcing or enforcing.
What Are the Roles and Responsibilities of NFRA?
The NFRA lays down certain regulations in the auditing and accounting standards. Before the formation of NFRA, the Institute of Chartered Accountants of India (ICAI) recommended accounting standards to the concerned parties. The role of the National Financial Reporting Authority can be summarised below:
- As an advisory board, NFRA can recommend certain standards related to accounting and finance. They can also promote awareness to comply with accounting standards.
- As an enforcement organisation, NFRA can keep auditors’ records and monitor their performance. Apart from overseeing the quality of service professionals provide, they can also cooperate with national and international organisations to establish policies adhering to accounting standards.
- The NFRA can also investigate professional or financial misconduct and take disciplinary actions or impose penalties on auditors or finance professionals.
- Rules 4(1) and 4(2) of the NFRA Rules, 2018 state the regulatory power of NFRA in safeguarding public interests. The Central government confers NFRA’s power to oversee all financial institutions and their auditing. It also aims to promote consciousness in dealing with financial entities.
What Is the Composition of NFRA?
The NFRA functions under the jurisdiction of the Companies Act, requiring them to have a Chairperson to head the institution. They must also have 15 members who possess certain qualities for selection. Qualities of the members of NFRA are as below:
- Experience in accounting, auditing, finance or law.
- Providing a no-conflict declaration to the central government.
- During their term (and until 2 years subsequently), the Chairperson and members should not associate themselves with any auditing or consultancy firm.
Apart from these rules, the NFRA should comprise the following individuals:
- A Chairperson who is a Chartered Accountant with experience in financial/auditing/accountancy laws and governance rules.
- One member each for accounting, auditing and enforcement.
- An ex-officio representative of the rank of Joint Secretary or above.
- A representative of the RBI who is a member of the RBI board.
- A representative of SEBI who is the chairman or whole-time member nominated by SEBI.
- A retired Chief Justice or a judge of any High court for more than 5 years nominated by the Central government.
- The ex-officio President of the Institute of Chartered Accountants of India.
- Any other individual nominated by the Chairperson to use their expert opinion.
What Are the Powers of the NFRA?
In accordance with the policies developed by the central government, the financial reporting authority can exercise certain powers, which are as below:
- Investigating the functioning of Chartered Accountant firms and looking for potential misconduct. Moreover, no other organisation can investigate proceedings initiated by NFRA.
- NFRA has the power to act as a Civil Court under the Code of criminal procedure for:
- Introducing books of account and other documents specified by NFRA.
- Ensuring attendance and oath-taking of summoned persons.
- Investigation of books, journals and registers in matters of public interest.
- Commissioning of examiners to take control of witnesses and documents.
- Matters of misconduct whereby NFRA is liable to impose punishments such as:
- Individuals charged under cases of proven misconduct are to pay penalties of Rs. 1,00,000 or five times the received fees.
- Firms charged under instances of misconduct to pay penalties of Rs. 5,00,000 or five times the received fees.
- Negating the validity of one’s office as a member of ICAI from 6 months to 10 years.