NFRA: Bringing auditors to book

Under Companies Bill 2012, the National Financial Reporting Authority (NFRA) will replace the National Advisory Committee on Accounting Standards (NACAS). However, NFRA is not just old wine in a new bottle. It will be a quasi-judicial body overseeing the overall quality of financial reporting. And like NACAS, it will also advise the Government on accounting policies and standards for companies or class of companies. In addition, it will perform the following functions:

Make recommendations to the Government on formulation of accounting and auditing policies, and standards for auditors;

Monitor and enforce compliance with accounting and auditing standards;

Oversee the service quality of the professions involved in ensuring compliance with standards, and suggest improvements; and

Perform other prescribed functions.

Under Companies Bill, until auditing standards are notified, the ICAI standards will hold. However, there is no similar provision for accounting standards, which will have to be notified by the NFRA. The Ministry of Corporate Affairs may notify accounting standards currently notified under the Companies (Accounting Standards) Rules 2006 (as amended) on enactment of the Bill.

The NFRA, in addition to setting standards and regulating financial reporting, will act as a disciplining authority for chartered accountants. It will investigate instances of professional or other misconduct, and have the same power as a civil court under the Code of Civil Procedure, 1908. It will also be empowered to impose strict penalties where professional or other misconduct is proved.

The NFRA can act against all chartered accountants, including auditors and company officials registered under the CA Act, if they fail to perform their duties. The Bill states that where the NFRA has initiated investigation into matters of misconduct, no other institute or body can initiate or continue any proceedings in the matter. As the CA Act also requires the Disciplinary Board/ Committee of the ICAI to deal with professional and other misconduct by members, there is room for overlap, and this should be resolved.

The outcome of investigations by NFRA can be different from disciplinary proceedings under the CA Act, where all misconducts by members are categorised into the First and Second Schedule. Depending on the nature of misconduct, the maximum fine can be either Rs 1 lakh or Rs 5 lakh. Similarly, the maximum period for which a member’s name can be removed from the register is either three months or lifetime. In contrast, under the Companies Bill, the minimum penalty for an audit firm is Rs 10 lakh, but this may be extended to ten times the fees received. Also, the NFRA can debar either the member concerned or the entire firm from practising for a minimum of six months and up to 10 years.

Other professionals such as company secretaries are not covered by the NFRA — their work may be regulated under other, appropriate legal clauses.

Asgar Khan is a senior professional in a member firm of Ernst & Young Global

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