A file photograph of a man looking through a book at a fair. (Photographer: Caitlin O’Hara/Bloomberg)

NFRA Rules Notified: Audit Super Regulator To Scrutinise Listed And Large Unlisted Companies

Five years after the Companies Act, 2013 provided for the creation of a National Financial Reporting Authority, an audit super regulator of sorts, the government has taken a step towards its creation.

The Ministry of Corporate Affairs has notified rules determining the jurisdiction, function and duties of the NFRA, as also its powers.

Wide Scope

The NFRA will regulate accounting and audit standards and quality of service of auditors of:

  • all companies whose securities are listed in India or outside.
  • unlisted companies with a paid up capital of not less than Rs 500 crore or an annual turnover of not less than Rs 1,000 crore or outstanding loans, debentures and deposits of not less than Rs 500 crore as on Mar. 31 of immediately preceding financial year.
  • insurance companies, banking companies and companies engaged in the generation or supply of electricity
  • large offshore subsidiaries and associates of the above companies if their income or networth exceeds 20 percent of the income or networth of the parent company.

This expansive scope comes as a surprise given the stiff resistance of the Institute of Chartered Accountants of India to the creation of the NFRA. So far the ICAI has regulated accountants and auditors and despite several government committees endorsing the need for a separate, independent regulator the ICAI has consistently lobbied against it.

Also read: Two Governments, Parliament And An Expert Body - How ICAI Is More Powerful Than All Of Them

Key Functions, Duties
The NFRA Rules give it authority to protect public interest and the interests of investors, creditors and others associated with companies by

  • Establishing high quality standards of accounting and auditing.
  • Exercising effective oversight of accounting functions performed by companies and auditing functions performed by auditors.

Accounting, Auditing Standards
The ICAI shall continue to make recommendations on new accounting and auditing standards and the NFRA will consider them before making recommendations to the government.

Monitoring Compliance
The regulator may review financial statements or seek further information from companies and their auditors in order to enforce compliance with accounting and auditing standards.

The Authority shall publish its findings relating to non-compliances on its website and in such other manner as it considers fit, unless it has reasons not to do so in the public interest and it records the reasons in writing.  
NFRA Rules, 2018

Powers
As specified in the Companies Act, the rules provide that the NFRA may direct auditors to take measures to improve audit quality. It has also been given wide powers of investigation including into professional misconduct.

In the case of professional or other misconduct the NFRA has the power to impose a monetary penalty as well as debar an audit member or a firm. While this has been laid down in the law, the rules specify the processes to be followed.

Their notification brings the NFRA one step close to fruition. The government has yet to appoint a chairperson and members, upto 15, before India can get an independent audit regulator, like so many major economies have.