(UPDATE: on 30th August 2013: Companies Bill became the Companies Act, 2013 (Act 18 of 2013). Post updated accordingly)
One of the foremost step for improving corporate governance since birth of concept of corporate governance is improving quality of accounting and auditing of companies. Audit Committee is one of these measures, which has been taken to improve standard of financial reporting. But concerns related to quality of financial reporting are not new. We can trace these concerns in earlier legislation, all earlier versions of the Companies Act in general and the Chartered Accountants Act, 1949. Without going deep in these laws, we simply say; what was otherwise need to enact such Act to regulate a profession of accounting and auditing, standardizing whole process of accounting and auditing.
The National Financial Reporting Authority is a quasi – judicial body to regulate matters related to accounting and auditing. With increasing demand of non – financial reporting, I may safely predict, a National Business Reporting Authority to regulate standards of all kind of reporting, financial as well as non – financial, from companies in near future.
The authority will change the way of notification of Accounting and Auditing Standards as clear from provisions of Sections 133 and 143 of the Companies Bill, 2012 the Companies Act, 2013.
Accounting and Auditing Standards:
The Central government may prescribe the standards of accounting as recommended by the Institute of Chartered Accountants of India in consultation with and after examination of the recommendations made by the National Financial Reporting Authority. (Section 133)
The Central government may also prescribe the standards of accounting as recommended by the Institute of Chartered Accountants of India in consultation with and after examination of the recommendations made by the National Financial Reporting Authority. (Sub – section (10) of Section 143)
The Central Government may in consultation with the National Financial Reporting Authority direct, in respect of such class or description of companies, as may be specified in the order that the auditor’s report shall also include a statement on such matters as may be specified there. (Sub – section (11) of Section 143)
Now, it is clear primary object behind establishment of the National Financial Reporting Authority to give its recommendation on accounting and auditing standards. But the main Section 132 gives wide range of power to the authority.
The constitution of National Financial Reporting Authority proposed to be constituted under Section 132 for matter related accounting and auditing standards.
There shall be a chairperson and not exceeding part – time and full – time members. The chairperson and all members shall make a declaration in prescribed form about no conflict of interest or lack of independence in respect of their appointment. The chairperson and all full – time members shall not be associated with any audit firm or related consultancy firm during course of their appointment and two years after ceasing to hold such appointment.
The seat of National Financial Reporting Authority shall be at New Delhi and it may meet as any place in
National Financial Reporting Authority shall:
- Make recommendations on formulation of accounting and auditing policies and standards for adoption by companies, class of companies or their auditors,
- Monitor and enforce the compliance with accounting standards,
- Oversee the quality of service of professions associated with ensuring compliance with such standards and suggest measures required for improvement in quality of service, and
- Perform such other functions as prescribed.
These duties simply bring chartered accountants, cost accountants, management accountants, company secretaries, as well as independent directors in audit committees under jurisdiction of Authority.
Jurisdiction, Powers and Penalties:
The National Financial Reporting Authority shall jurisdiction over bodies corporate and persons into matters of professional and other misconduct committee by any member or firm of chartered accountants registered under the chartered Accountants Act, 1949. No other institute or body shall initiate or continue any proceeding in such matters of misconduct where the authority has initiated an investigation under this section.
The authority shall have powers as are vested in a civil court under Code of Civil Procedure in respect of following matters:
- Discovery and production of books of accounts and other documents
- Summoning and enforcing the attendance of persons and examining them on oath
- Inspection of any books, registers and other documents of any person
- Issuing commission for examination of witness or documents.
The authority shall have power to make an order for
- Imposing penalty of (i) not less than one lakh rupees which may extend to five times of the fees received in case of individuals and (ii) not less than ten lakh rupees which may extend to ten times of the fees received in case of firms
- Debarring member or the firm from engaging himself or itself from practice for a period of six months to ten years.
Appeals and Appellate Authority:
Any person aggrieved by any order of the National Financial Authority may prefer appeal to Appellate Authority.
The appellate authority shall consist of a chairperson and not more than two members.
My hard comments:
As I told earlier that quality of accounting and auditing are under public scanner and concern for law makers since long, But these concerns are still remain as such. Whether, this was failure of profession itself, failure of its regulatory body or simply failure of regulator of these regulatory bodies.
National Financial Reporting Authority would be a body blow for the present accounting and auditing regulator (Institute of Chartered Accountants of India), which faces the prospect of losing regulatory hold over its members. This is also a warning for other professional regulators particularly, Institute of Company Secretaries of India and Institute of Cost Accountants of India to work hard to keep their regulatory function to themselves.
I have feeling that these professionals institutes fails to regulate their members but act as a trade union seeking more employment opportunities for their members compromising standards and qualities of professional services. Their council elections are being fought in name of new opportunities not in name of more self regulations, more public confidence, and more strict actions against wrongdoers.
All these institutes were under cat fight since long for new opportunities but fail to bring respect and acceptability to professions themselves. Chartered Accountants are reportedly signing balance sheets without even any accounting record. Company Secretaries fail to gain acceptability in market and majority of companies are yet to hire them as per existing law. Cost Accountants are just gaining some confidence last year by still under watch.
Recent reports of indulgence of past or present Executive Council members in from land scam to insider trading are not good sign for public confidence in these professions.
With this particular note, I hope, Proposed National Financial Reporting Authority shall bring some real standardisation and quality into professions.
Please note blog post is not a professional advice but general information about the subject covered here. I appreciate if my readers share this post on social media and with friends and colleagues.