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NFRA Applicability

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NFRA Applicability

 

The National Financial Reporting Authority is a body which was incorporated by the government of India in the year 2018. It is formed as an independent body for regulating the auditing profession. The precursor to the formation of this body was namely the Satyam Scandal which took place in India in 2009. The government seeing the after effects of the financial scandal proposed the idea of forming an independent body for the regulation of auditing system in the country. This is how NFRA was born under Section 132 of the Companies Act of 2013. This was done with the basic idea of bringing reliability as well as transparency in the financial statements of both listed and large unlisted companies in the country.

The NFRA came into active existence on 1st of October 2018. The functioning body of the NFRA was decided as

  1. A chairperson who is directly appointed by the Central government
  2. A body comprising of a maximum of 15 members which comprises of 3 full time members and one secretary

Both the chairperson and the members of the body needed basic eligibility as drafted by the government of

  1. Both the members as well as the chairperson was not allowed to be associated with any audit firms registered not only during the term of his/ her office but 2 years after leaving office as well
  2. All members of the body including the chairperson should have brushed up skills and an experts eye in auditing, finance accountancy or law
  3. The members of the functioning body of the NFRA need to declare absence of conflict of interest or lack of independence in their appointment to the central government
  4. The Chairperson shall be a Charted Accountant
  5. The member body shall comprise of
  6. Member for enforcement
  7. Member for auditing
  • Member for accounting
  1. A joint Secretary or equivalent rank from the Ministry of Corporate Affairs
  2. President of the Institute of CA of India (ex-officio)
  3. A retired judge of a high court (with a minimum work tenure of 5 years) or a retired chief justice of high court
  • Representative form the SEBI who is either the chairman of SEBI or whole time member of SEBI , as nominated
  • Representative of Reserve Bank of India who should be the member of the RBI board

Although the government has given guidelines for appointing the President of the Institute of Charters Accountants as a member of the Functioning Body but Institute of Chartered Accountants of India is not quite open to  the establishment of the IFRA as it fears the reduction in this own authorities and powers or sharing the same with the new body.

AUTHORITIES GIVEN TO THE NFRA

The central government of India has given certain specified powers to the newly formed NFRA body

    1. The NFRA has been given the authority by the government to investigate the reports of misconduct or inappropriate professional behaviour by a Chartered Accountant’s Firm or an individual Charted Accountant. Once the matter reported is under investigation with the NFRA no other authority has the permission to interfere or investigate. The NFRA can itself shortlist any such matter to be investigated or the central government can refer any investigative matter.
    2. If the investigations completed by the NFRA prove the body guilty then the government has given the NFRA to penalise the one found guilty in the following ways

a)If the one proven guilty of the offence is a firm a fine between Rs 5,00,000 up to 10 times the value of the fee charged by the firm
b)If the ne proven guilty of the offence is an individual a fine from 1,00,000 up to 5 times the fee charged by the CA
c)Debarring the firm or individual from practicing for 6years which can increase up to 10 years

  1. The NFRA has been given powers which are similar to that of a Civil Court as per the Code of Criminal Procedure of 1908 in matters related to
  2. Inspection of documents, books or registers of an individual being investigated at any point of time and any place
  3. Enforcing and mandating the presence of the person or representative of the firm being investigated
  • Demanding production of documents or any of the books of accounts of the individual or firm being investigated

Even though the government has made all such provisions for the NFRA but to make all matters free from biased results the government has also made proviso CAs or the CA firms to be heard if they are non-satisfied by the findings and orders made by the NFRA.

With the applicability of the NFRA as drafted it is expected from the body to reduce and in future eradicate financial scams in

  1. All the listed companies
  2. All unlisted companies which
  3. Have an annual turnover or more than Rs 1000 cr
  4. Have a minimum net worth of Rs 500 cr
  • Have a minimum paid up capital of Rs 500 cr
  1. Companies who have their securities listed outside the country
  2. Audit firms or auditors who audit
  • 200 companies or more
  • More than 20 listed companies in any given financial year

With the introduction of NFRA the financial market expects more confidence in investors due to more transparency. It increases the effectiveness of tighter governance on auditing bodies. The NFRA is expected to function as a watchdog to benefit the interest of investors, creditors and public.

Frequently Asked Questions (FAQ)

What are the penalizing powers given to the NFRA?

If the investigations completed by the NFRA prove the body guilty then the government has given the NFRA to penalize the one found guilty in the following ways

  1. If the one proven guilty of the offence is a firm a fine between Rs 5,00,000 up to 10 times the value of the fee charged by the firm
  2. If the ne proven guilty of the offence is an individual a fine from 1,00,000 up to 5 times the fee charged by the CA
  3. Debarring the firm or individual from practicing for 6years which can increase up to 10 years

Who all can be investigated under the NFRA authority?

The central government has authorized the NFRA to investigate

  1. All the listed companies
  2. All unlisted companies which
  • Have an annual turnover or more than Rs 1000 cr
  • Have a minimum net worth of Rs 500 cr
  • Have a minimum paid up capital of Rs 500 cr
  1. Companies who have their securities listed outside the country
  2. Audit firms or auditors who audit
  • 200 companies or more
  • More than 20 listed companies in any given financial year

 What is the qualification required for a person to be appointed as a Chairman to the NFRA?

The central government has direct appointing authority for the Chairman of NFRA and the minimum qualification has been prescribed as Charted Accountant

When was NFRA? When was it incorporated?

The NFRA which is National Financial Reporting Authority is a body which was incorporated by the government of India in the year 2018. It is formed as an independent body for regulating the auditing profession.

 What is the composition of the functioning body of the NFRA as drafted by the government of India?

The NFRA came into active existence on 1st of October 2018. The functioning body of the NFRA was drafted as

  1. A chairperson who is directly appointed by the Central government
  2. A body comprising of a maximum of 15 members which comprises of 3 full time members and one secretary

What is the sole purpose of incorporating NFRA?

NFRA was incorporated in year due to the occurrence of various financial scams in the country. The government required an independent regulatory body to monitor and investigate auditing firms and individuals. Therefore NFRA was formed.

Who have been prescribed by the government under the NFRA to be appointed as the members of the functioning body?

The members prescribed by the government for forming NFRA functioning body

  1. Member for enforcement
  2. Member for auditing
  3. Member for accounting
  4. A joint Secretary or equivalent rank from the Ministry of Corporate Affairs
  5. President of the Institute of CA of India (ex-officio)
  6. A retired judge of a high court (with a minimum work tenure of 5 years) or a retired chief justice of high court
  7. Representative form the SEBI who is either the chairman of SEBI or whole time member of SEBI , as nominated
  8. Representative of Reserve Bank of India who should be the member of the RBI board

Why has ICAI dislike the formation of NRFA?

Although the government has given guidelines for appointing the President of the Institute of Charters Accountants as a member of the Functioning Body but Institute of Chartered Accountants of India  is not quite open to  the establishment of the IFRA as it fears the reduction in this own authorities and powers or sharing the same with the new body.

 What are the provisions for CA and CA firms who have been investigated by NFRA?

The government has given the CA and CA firms who are being investigated by the NFRA to be heard before being penalized if they are not satisfied by the decision taken by the NFRA.

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