Government’s Plan on NFRA

Why in news?

Union government has approved the proposal to set up the National Financial Reporting Authority (NFRA).

What is the proposal about?

• National Financial Reporting Authority (NFRA) is intended to serve as an independent regulator for the auditing profession.
• Section 132 of the Companies Act, 2013 gives the Centre the power to set up such an authority.
• According to it, NFRA can do the following:

1. recommend to the Centre formulation of accounting and auditing standards and polices to be adopted by companies and auditors
2. monitor and enforce such standards and policies
3. oversee quality of services of the professions associated with the compliance of these standards and policies

What is the role of Companies Act in accounting?

• The Companies Act casts a responsibility on auditors to see that corporate accounts are in order.
• Auditors can choose not to sign the accounts if their concerns are not addressed by the management.
• The Companies Act also allows auditors to report to the Centre if they believe an offence involving fraud is being committed.
• This could be by the company, by its officers or the employees.

What are the powers of NFRA?

• NFRA will comprise a chairperson, three full-time members and a secretary.
• It can investigate into professional matters or misconduct of any member or a firm of chartered accountants.
• It can issue summons and examine on oath.
• It can also inspect any book, registers and documents of any professional/firms probed.
• It may impose penalties, and is even empowered to debar a member of a firm.

What is the need?

• Across the world, there have been instances of scams involving the help of Auditors.
• In India, this situation is worse as there is no reliable audit regulator.
• Union government’s recent move is to fill the reliability gap in audit regulation.
• Setting up the NFRA indicates, to an extent, the lack of trust in ICAI (Institute of Chartered Accountants of India) to effectively address malpractices.

What is the significance of NFRA?

• The NFRA was brought into the Companies Act on the specific recommendations of the Standing Committee on Finance.
• Its jurisdiction will cover investigation of chartered accountants and their firms covering both listed and unlisted public companies.
• The inherent regulatory role of the ICAI as provided for in the Chartered Accountants Act, 1969 will continue but its threshold limits will be modified.
• NFRA could thus significantly help oversee the functioning of the Institute of Chartered Accountants of India (ICAI).
• It will also ensure credibility in financial reporting.

Source: The Hindu

Quick Fact

Institute of Chartered Accountants of India

• The Institute of Chartered Accountants of India (ICAI) is a statutory body.
• It was established by The Chartered Accountants Act, 1949.
• The Institute, functions under the administrative control of the Ministry of Corporate Affairs.
• It is aimed at regulating the profession of Chartered Accountancy in the country.