India approved the draft rules for establishing a new body to oversee auditing and accounting standards in India as the Narendra Modi administration attempts to strengthen the country’s financial system hit by a Rs 12,700-crore fraud.
Five years after it was legislated, the National Financial Reporting Authority is finally about to become reality. The Cabinet in a meeting today approved draft rules to decide on the NFRA’s jurisdiction and functions and will notify the NFRA soon, said Finance Minister Arun Jaitley in a media briefing.
As per the Companies Act, 2013 the NFRA is tasked with the job of recommending accounting and auditing standards, ensuring compliance with them and overseeing the quality of service of the accounting and audit professions. It has also been given the power to investigate matters of professional misconduct by chartered accountants or CA firms, impose penalty and debar the CA or firm for up to 10 years.
Opposition by the Institute of Chartered Accountants of India has been a key reason why the government has not notified the NFRA yet. So far, the ICAI, a self-regulatory body, has had the monopoly on training and qualifying chartered accountants, giving them license to practice and regulating them including scrutinising audit quality.
The ICAI will continue to exercise these powers over small companies, said Jaitley. The NFRA will have jurisdiction over listed companies and large, unlisted companies, he added.
NFRA is not meant to replace the disciplinary jurisdiction of the ICAI. Therefore in all the routine cases, which will be the bulk of cases, the ICAI will perform its function.Finance Minister Arun Jaitley
The Companies Act, 2013 provides for the NFRA to be headed by a chairperson and upto 15 other members.
“The National Financial Reporting Authority shall consist of a chairperson, who shall be a person of eminence and having expertise in accountancy, auditing, finance or law to be appointed by the Central Government…”
Importantly, the Act states that “no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the National Financial Reporting Authority has initiated an investigation.”
The world over more than 50 countries have moved away from self-regulatory professional accountant bodies and created independent audit regulators. In India, the move to set up a new oversight body for the accounting and audit professions was approved by a parliamentary panel nearly eight years ago.
“India remains the only major economy where the audit profession is still considered self- regulated,” Vishesh Chandhiok, national managing partner of accounting and consultancy firm Grant Thornton India said in an emailed statement.
The government’s decision to soon notify the NFRA comes right after the fraud at the Punjab National Bank where billionaire Nirav Modi and his firms allegedly obtained fraudulent guarantees to get short-term loans overseas. Earlier this week the internal chief auditor of PNB was arrested by the Central Bureau of Investigation. The fraud has raised questions regarding the failure of internal and external auditors to notice the guarantees being issued to Modi entities.
The PNB case was the final nail in the coffin which pushed the government to approve NFRA, said Amarjit Chopra, former president of the ICAI in an interview to BloombergQuint.
Like we normally enhance our security, NFRA will lead to an enhancement in securing our financial sector, said S Santhanakrishnan, managing partner at accounting firm PKF India and independent director on a Tata Group company board, in a phone interview to BloombergQuint.
The only thing is we need to be very careful in manning the NFRA with people of highest integrity. We have enough institutions, we need to make laws effective and strengthen the institutions.S Santhanakrishnan, Managing Partner, PKF India
The ICAI is awaiting the draft rules, said President Naveen Gupta in an interview to BloombergQuint. I’m not aware of what will be a small company and what will be a large company, he added in the context of the reduced powers of ICAI.
When asked why the ICAI had opposed the NFRA all these years, Gupta said “whenever we are called for stakeholder consultations, we provide our inputs”.
I would encourage the profession in India to welcome the NFRA as a golden opportunity to enhance standards, audit quality and above all value of the audit attestation.Vishesh Chandhiok, National Managing Partner, Grant Thornton India
The NFRA is likely to be notified in 10-15 days, a government official told BloombergQuint earlier.