National Financial Reporting Authority (NFRA), the country’s sole independent audit regulator, is working with government to implement certain recommendations of the Company Law Committee (CLC) report submitted in March this year, its Chairman Ajay Bhushan Pandey said on Wednesday.

“NFRA is still in evolution phase. It needs strengthening in terms of regulation making power. We are working with government to ensure that the suggestions are implemented,” Pandey said at FICCI’s 19th Capital Markets Conference— CAPAM 2022.

NFRA, which was set up in October 2018, is now toying with the idea of putting in place a mechanism — say sending an “advisory” to companies and their auditors to make them aware of various accounting and auditing irregularities that happen at the ground level or even set up forums in association with industry chambers to discuss various issues.

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“We are thinking of starting a Advisory system so that companies’ senior management are aware and auditors become aware. The idea is to reach out to the entire ecosystem. We find that many points that are emerging are common across companies and auditors,” Pandey said.

It may be recalled that the CLC had in March this year submitted its report that recommended several measures to strengthen NFRA as an independent audit regulator. The objective of setting up NFRA is to ensure oversight over professionals in their audit and accounting related services to companies.

Currently, NFRA does not have any regulation-making powers under Companies Act 2013. So the CLC had recommended that the law may be amended to include enabling powers for NFRA to make regulations concerning certain matters. 

One issue observed by CLC was that NFRA did not have powers to take actions against individuals and firms for non-compliance with Companies Act 2013 and requirements thereunder, which do not qualify as ‘professional or other misconduct’. 

In particular, it was informed that as per data with the MCA, approximately 11,000 auditors had not filed NFRA 2 – an annual return to be filed by auditors under Rule 5 of the NFRA Rules, 2018. 

So the CLC recommended that NFRA should be empowered to take appropriate action against other contraventions in addition to its existing powers to take action against ‘professional or other misconduct’. 

There should also be specific provisions to enable NFRA to initiate appropriate penal action in case its orders are neither complied with nor any appeal against such an order has been filed in the NCLAT.

Financial autonomy

To give more financial autonomy to NFRA, the CLC had recommended amendments be made to Companies Act 2013 for the constitution of an NFRA Fund.

In keeping with the need for operational autonomy of NFRA, the CLC recommended that company law be amended to provide the NFRA Chairperson with powers of general superintendence and direction within the regulatory body.

The Centre is widely expected to bring amendments to Companies Act 2013 in the winter session this year. Indications are that several suggestions made by the CLC to strengthen NFRA will get reflected in the amendment Bill, sources said.