National Financial Reporting Authority (NFRA) and its Duties

Section 132 of the Companies Act, 2013 is the point of debate and hope for corporate governance. It paves way for constitution of National Financial Reporting Authority – a super-regulatory for statutory auditors – Chartered Accountants. Optimists see it as predecessor of a future super-regulator for self regulatory statutory professional organizations – Institute of Chartered Accountants of India regulating chartered accountants and statutory auditors, Institute of Cost Accountants of India (earlier Institute of Cost and Works Accountants of India) regulating cost and management accountants and cost auditors, and Institute of Company Secretaries of India regulating company secretaries and secretarial auditors. We earlier discussed the provision of original Section 132 earlier here.

In this post, we will discuss Duties of NFRA under Section 132 and the National Financial Reporting Authority Rules, 2018 as on 13^th November 2018. Powers of NFRA to investigate and disciplinary proceeding shall be discussed in next post.

Interesting Enforcement Dates

Section 132 was notified to come into force in a piecemeal manner and its 4 sub-sections out of 15 deleted with effect from 9^th February 2018 by the Companies (Amendment) Act, 2017. Effective dates are as under:

132(1)                                   1^st October 2018

132(2)                                   24^th October 2018

132(3)                                   21^st March 2018

132(4)                                   24^th October 2018

132(5)                                   24^th October 2018

132(6)                                  Deleted without coming into force on 9^th February 2018

132(7)                                  Deleted without coming into force on 9^th February 2018

132(8)                                  Deleted without coming into force on 9^th February 2018

132(9)                                  Deleted without coming into force on 9^th February 2018

132(10)                                 24^th October 2018

132(11)                                 21^st March 2018

132(12)                                 1^st October 2018

132(13)                                 24^th October 2018

132(12)                                 24^th October 2018

132(14)                                 24^th October 2018

132(15)                                 24^th October 2018

The National Financial Reporting Authority Rules, 2018 came into force with effect from 13^th October 2018.

Constitution of NFRA

The Central Government may, by notification, constitute a National Financial Reporting Authority to provide for matters relating to accounting and auditing standards under this Act. {Section 132(1)}

The Central Government by Notification S.O. 5099(E) dated 1st October 2018 the 1st October 2018 as the date of constitution of National Financial Reporting Authority.

Jurisdiction

The Authority shall have power

• to monitor and enforce compliance with accounting standards and auditing standards,
• oversee the quality of service under sub-section (2) of section 132 or
• undertake an investigation under sub-section (4) of section 132. {Rule 3(1)}

The Authority shall have jurisdiction in relation to auditors of the following class of companies and bodies corporate, namely:-

1. companies whose securities are listed on any stock exchange
   1. in India or
   2. outside India;
2. unlisted public companies
   1. having paid-up capital of not less than rupees five hundred crores as on the 31st March of immediately preceding financial year; or
   2. having an annual turnover of not less than rupees one thousand crores as on the 31st March of immediately preceding financial year; or
   3. having, in aggregate, outstanding loans, debentures and deposits of not less than rupees five hundred crores as on the 31st March of immediately preceding financial year;
3. insurance companies, banking companies, companies engaged in the generation or supply of electricity, companies governed by any special Act for the time being in force or bodies corporate incorporated by an Act (of parliament)

However it seems this clause shall be limited by the exception mentioned in clauses (b), (c), (d), (e) and (f) of sub-section (4) of section 1 of the Act. This may be another example of poor drafting.

Unlike clause(c), it seems there is no monetary limit on jurisdiction under (d) here.

1. any body corporate or company or person, or any class of bodies corporate or companies or persons, on a reference made to the Authority by the Central Government in public interest; and
2. a body corporate incorporated or registered outside India, which is a subsidiary or associate company of any company or body corporate incorporated or registered in India as referred to in clauses (a) to (d);

However, this extension of jurisdiction shall be applicable if the income or net worth of such subsidiary or associate company exceeds twenty per cent of the consolidated income or consolidated net worth of such company or the body corporate, as the case may be. {Rule 3(1)}

Continuing Jurisdiction for Certain Period

A company or a body corporate governed under this rule shall continue to be governed by the Authority for a period of three years after it ceases to a company governed under Rule 3(1). {Rule 3(4)}

Delegated Jurisdiction

The Central Government may by notification delegate any of its powers or functions under the Act, other than the power to make rules, to the Authority. Such delegation may be and subject to such conditions, limitations and restrictions as may be specified in such delegation notification. {Rule 4(3)}

Duties

National Financial Reporting Authority shall:

1. Make recommendations on the formulation of accounting and auditing policies and standards for adoption by companies, class of companies or their auditors,
2. Monitor and enforce the compliance with accounting standards,
3. Oversee the quality of service of professions associated with ensuring compliance with such standards and suggest measures required for improvement in the quality of service, and
4. Perform such other functions as prescribed. {Section 132(2)}

General Duties and function prescribed

The Authority shall

• protect the public interest and the interests of investors, creditors and others associated by establishing high-quality standards of accounting and auditing;
• exercising effective oversight of accounting functions performed by the companies and bodies corporate and
• exercising effective oversight of auditing functions performed by auditors {Rule 4(1)}

Particular Duties and function prescribed

The Authority shall:

1. maintain details of particulars of auditors appointed in the companies and bodies corporate specified in rule 3;
2. recommend accounting standards and auditing standards for approval by the Central Government;
3. monitor and enforce compliance with accounting standards and auditing standards;
4. 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;
5. promote awareness in relation to the compliance of accounting standards and auditing standards;
6. co-operate with national and international organisations of independent audit regulators in establishing and overseeing adherence to accounting standards and auditing standards; and
7. perform such other functions and duties as may be necessary or incidental to the aforesaid functions and duties. {Rule 4(2)}

Recommending accounting standards and auditing standards

For the purpose of rule 4(2)(b)for approval by the Central Government, the Authority:

(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 clause (a), if required. {Rule 6(1)}

Manner of seeking additional information

The Authority shall consider the recommendations and additional information in such manner as it deems fit before making recommendations to the Central Government. {Rule 6(2)}

Monitoring and enforcing compliance with accounting standards

For the purpose of first part Rule 4(2)(c), the Authority may review the financial statements of such company or body corporate under its jurisdiction. The authority may direct such company or body corporate or its auditor by a written notice, to provide further information or explanation or any relevant documents relating to such company or body corporate, within such reasonable time as may be specified in the notice. {Rule 7(1)}

The Authority may require the personal presence of the officers of the company or body corporate and its auditor for seeking additional information or explanation in connection with the review of the financial statements of such company or body corporate. {Rule 7(2)}

Monitoring and enforcing compliance with auditing standards

For the purpose of second part Rule 4(2)(c), the Authority may:

• review working papers (including audit plan and other audit documents) and communications related to the audit;
• evaluate the sufficiency of the quality control system of the auditor and the manner of documentation of the system by the auditor; and
• perform such other testing of the audit, supervisory, and quality control procedures of the auditor as may be considered necessary or appropriate. {Rule 8(1)}

The Authority may require an auditor to report on its governance practices and internal processes designed to promote audit quality, protect its reputation and reduce risks including risk of failure of the auditor. The Authority may take such action on the report as may be necessary.  {Rule 8(2)}

 The Authority may seek additional information or may require the personal presence of the auditor for seeking additional information or explanation in connection with the conduct of an audit. {Rule 8(3)}

 The Authority shall perform its monitoring and enforcement activities through its officers or experts with sufficient experience in audit of the relevant industry. {Rule 8(4)}

Publication and reporting

The Authority shall publish its findings relating to non-compliance on its website and in such other manner as it considers fit unless it has reasons not to do so in the public interest and it records the reasons in writing. {Rule 7(3) and Rule 8(5)}

The Authority shall not publish proprietary or confidential information unless it has reasons to do so in the public interest and it records the reasons in writing. { Rule 8(6)}

The Authority may send a separate report containing proprietary or confidential information to the Central Government for its information. Rule 8(7)}

Where the Authority finds or has reason to believe that any accounting standard or auditing standard has or may have been violated, it may decide on the further course of investigation or enforcement action through its concerned Division. {rule 7(4) and Rule 8(8)}

Overseeing the quality of service

For the purpose of Rule 4(1)(d):

• On the basis of its review, the Authority may direct an auditor to take measures for improvement of audit quality including changes in their audit processes, quality control, and audit reports and specify a detailed plan with time-limits.
• It shall be the duty of the auditor to make the required improvements and send a report to the Authority explaining how it has complied with the directions made by the Authority.
• The Authority shall monitor the improvements made by the auditor and take such action as it deems fit depending on the progress made by the auditor.
• The Authority may refer cases with regard to overseeing the quality of service of auditors of companies or bodies corporate referred to in rule 3 to the Quality Review Board constituted under the Chartered Accountants Act, 1949 (38 of 1949) or call for any report or information in respect of such auditors or companies or bodies corporate from such Board as it may deem appropriate.
• The Authority may take the assistance of experts for its oversight and monitoring activities. {Rule 9}

There will certainly a conflict of the jurisdiction of NFRA and QRB, which may render QRB a toothless tiger.