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-regulator 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 Section 132 earlier here.
In this post, we will discuss Section 132 and the National Financial Reporting Authority Rules, 2018 as on 13th November 2018.
In an earlier post here, we discussed Duties of NFRA under Section 132 and the National Financial Reporting Authority Rules, 2018 as on 13th November 2018. In this post, we will discuss powers of NFRA to investigate and disciplinary proceeding as on 13th November 2018.
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 9th February 2018 by the Companies (Amendment) Act, 2017. Effective dates are as under:
132(1) 1st October 2018
132(2) 24th October 2018
132(3) 21st March 2018
132(4) 24th October 2018
132(5) 24th October 2018
132(6) Deleted without coming into force on 9th February 2018
132(7) Deleted without coming into force on 9th February 2018
132(8) Deleted without coming into force on 9th February 2018
132(9) Deleted without coming into force on 9th February 2018
132(10) 24th October 2018
132(11) 21st March 2018
132(12) 1st October 2018
132(13) 24th October 2018
132(12) 24th October 2018
132(14) 24th October 2018
132(15) 24th October 2018
The National Financial Reporting Authority Rules, 2018 came into force with effect from 13th October 2018.
Powers of NFRA
Investigative powers
The National Financial Reporting Authority shall have the power to investigate into matters of professional and other misconduct committed 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. {Section 132(4)(a)}
Manner of investigation
The Authority shall forward a matter to its Division dealing with enforcement for carrying out investigation and other action, where it:
(a) received any reference from the Central Government for an investigation into any matter of professional or other misconduct;
(b) decided to undertake an investigation into any matter on the basis of its compliance or oversight activities; or
(c) decided to undertake suo motu investigation into any matter of professional or other misconduct, after recording reasons in writing for this purpose, it shall forward the matter to its Division dealing with enforcement for carrying out investigation and other action. {Rule 10(1)}
Reporting of Fraud
The authority shall report its finding to the Central Government after investigation where evidence shows that any company or body corporate has not complied with the requirements under the Act or rules which involve or may involve fraud amounting to rupees one crore or more. {Rule 10(2)}
Power of civil courts
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. {Section 132(4)(b)}
Power to impose penalty and debarring
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 five lakh rupees which may extend to ten times of the fees received in case of firms. {Section 132(4)(c)(A)}
The penalty in case of form originally was ten lakh rupees which were reduced by the Companies Amendment Act, 2017 with effect from 9th February 2018 much before this provision come into force on 24th October 2018.
The authority shall have the power to make an order for the debarring member or the firm from engaging himself or itself from practice for a period of six months to ten years. {Section 132(4)(c)(B)}
The expression “professional or other misconduct” shall have the same meaning assigned to it under section 22 of the Chartered Accountants Act, 1949. {Explanation to Section 132(4)}
Division of powers between NFRA and ICAI
National Financial Reporting Authority
The action in respect of cases of professional or other misconduct against auditors of companies referred to in rule 3 shall be initiated by Authority and no other institute or body shall initiate any such proceedings against such auditors.
No other institute or body shall initiate or continue any proceedings in such matters of misconduct where the Authority has initiated an investigation. {Rule 10(3)(a)}
Institute of Chartered Accountants of India
The action in respect of cases of professional or other misconduct against auditors of companies or bodies corporate other than those referred to in rule 3 shall continue to be proceeded with by the Institute of Chartered Accountants of India as per provisions of the Chartered Accountants Act, 1949 and the regulations made thereunder.
Manner of Disciplinary Proceeding
If the Authority believes that sufficient cause exists to take actions permissible under sub-section (4) of section 132, it shall refer the matter to the concerned division, which shall cause a show-cause notice to be issued to the auditor.
This opinion of existence of the sufficient cause shall be based on:
- the reference received from the Central Government or
- findings of its monitoring or enforcement or oversight activities, or
- material otherwise available on record. {Rule 11(1)}
Show Cause Notice
The show-cause notice shall be in writing, and shall, inter alia, state-
(a) the provisions of the Act or rules under which it has been issued;
(b) the details of the alleged facts;
(c) the details of the evidence in support of the alleged facts;
(d) the provisions of the Act, rules or the accounting standards or auditing standards thereunder allegedly violated, or the manner in which the public interest is allegedly affected;
(e) the actions that the Authority proposes to take or the directions it proposes to issue if the allegations are established;
(f) the time limit and the manner in which the auditor is required to respond to the show-cause notice;
(g) the consequences of failure to respond to the show-cause notice; and (h) the procedure to be followed for disposal of the show-cause notice. {Rule 11(2)}
Copies of Documents with Show Cause Notice
The show-cause notice shall enclose copies of documents relied upon and extracts of relevant portions from the report of investigation or other records. {Rule 11(3)}
Service of Show Cause Notice
The show-cause notice shall be served on the auditor in the following manner, namely –
(a) by sending it to the auditor at the address provided by him or provided by the Institute of Chartered Accountants of India (if required by the Authority) by registered post with acknowledgement due; or
(b) by an appropriate electronic means to the email address of the auditor provided by him or it or provided by the Institute of Chartered Accountants of India (if required by the Authority). {Rule 11(4)}
Deeming of notice and responsibility to reply in case of a firm
where the auditor is a firm –
(a) a notice to a firm shall be deemed to be a notice to all the partners or employees of that firm as on the date of service of notice;
(b) the notice shall call upon the firm to disclose the name or names of the partner or partners concerned who shall be responsible for answering the allegations;
(c) the partner whose name is disclosed by the firm shall be responsible for answering the notice against the firm, and if no partner, whether erstwhile or present, of the firm, owns responsibility for the allegations made against the firm, then the firm as a whole shall be responsible for answering the allegations, and all the partners and employees of that firm as on the date of occurrence of alleged misconduct, shall be responsible for answering the allegations. {Proviso to Rule 11(4)}
Manner of Order on Show Cause Notice
The Division shall dispose of the show-cause notice within a period of ninety days of the assignment through a summary procedure. The order shall be a reasoned order in adherence to the principles of natural justice including where necessary or appropriate an opportunity of being heard in person, and after considering the submissions, if any, made by the auditor, the relevant facts and circumstances, and the material on record.
Order on Show Cause Notice
The order disposing of a show-cause notice may provide for-
(a) no action;
(b) caution;
(c) action for imposing a penalty against auditor Section 132(4)(c)(A) or for debarring the auditor from engaging as such under Section 132(4)(c)(B) or both.
Effective Date of Order
The order shall not become effective until thirty days have elapsed from the date of issue of the order unless the Division states otherwise in the order along with the reason for the same.
Service of the Order
The order shall be served on the auditor in the manner specified in sub-rule (3). {Rule 8}
A copy of the order shall be sent in all cases to – (a) the Central Government; and (b) the Institute of Chartered Accountants of India. {Rule 8(i)}
A copy of the order shall be sent, in the case of a government company, to the Comptroller and Auditor General of India {Rule 8(ii)}
A copy of the order shall be sent in the case of a listed company to the Securities and Exchange Board of India. {Rule 8(iii)}
A copy of the order shall be sent in the case of a bank or a non-banking finance company to the Reserve Bank of India. {Rule 8(iv)}
A copy of the order shall be sent in the case of an insurance company to the Insurance Regulatory and Development Authority of India. {Rule 8(v)}
A copy of the order shall be sent in case the auditor is resident outside India to the concerned regulator of such country. {Rule 8(vi)}
A copy of the order shall be published on the website of the Authority. {Rule 8}
Manner of enforcement of orders
Monetary Penalty
Where the order passed relates to the imposition of a monetary penalty on any auditor, the auditor shall deposit the amount of penalty with the Authority within thirty days of the order. {Rule 12(1)
Where the auditor prefers an appeal against the order of the Authority, it shall deposit ten per cent of the amount of the monetary penalty with the Appellate Tribunal. {Proviso to Rule 12(1)}
Non – payment of Penalty and appointment of new auditor
If the auditor neither pays the penalty nor appeals against the order within thirty days of the order, the Authority shall, without prejudice to any other action, inform about such non-compliance to every company or body corporate (including those not covered by rule 3) in which the auditor is functioning as an auditor. Upon receipt of such information of non-compliance, every such company or body corporate shall appoint a new auditor in accordance with the provisions of the Act. {Rule 12(2)}
It may be treated as a casual vacancy.
Information of penalty and debarring
Where the order imposes a penalty on the auditor or debars the auditor from practice, the order shall be sent to every company or body corporate in which the auditor is functioning as an auditor. {Rule 12(4)}
Appointment of New Auditor
The order passed debars the auditor from practice or information of non – payment shall be sent to every company or body corporate (including those not covered by rule 3) in which the auditor is functioning as auditor and every such company or body corporate shall appoint a new auditor in accordance with the provisions of the Act. {Rule 12(5)}
It may be treated as a casual vacancy.
Punishment in case of non-compliance
If a company or any officer of a company or an auditor or any other person contravenes any of the provisions of these rules, the company and every officer of the company who is in default or the auditor or such other person shall be punishable as per the provisions of section 450 of the Act.
AishMGhrana 