NFRA: Double Review mechanism
on Indian Companies
BACKGROUND
National
Financial Reporting Authority (“NFRA”) is newly set up independent regulator of
the Audit profession. It is one such body proposed under Companies Act 2013 to
double check and to oversee the quality of service rendered by Chartered
Accountants in India to provide review on matters relating to Accounting and
Auditing standards and thereby suggesting measures of improvement.
Prior
to the set up of NFRA, ICAI used to monitor the Auditors of big companies.
However, NFRA is not meant to replace ICAI totally. For large entities including
Listed entities, NFRA shall monitor and enforce the compliances with Accounting
and Auditing standards.
This
move for establishment of NFRA is to act against erring Auditors and Auditing
firms to reduce the corporate scams in India, thereby to ensure better
compliances by the Indian Corporates.
When is
the Notification passed?
The
Central Government vide its notification dated 13thNovember 2018
has introduced the National Financial Reporting Authority (“NFRA”) Rules, 2018.
The National Financial Reporting Authority Rules, 2018 comprises of 19 Rules
for the regulation of the authority, its members, auditors and body corporate.
When is
the NFRA Rules effective?
To
be effective from the 14thNovember 2018.
What
are the relevant provisions to NFRA?
·
Sub section (2) and (4) of Section 132:-
Constitution of National Financial Reporting Authority
·
Sub
section (1) of Section 139:- Appointment of Auditors
·
Sub
section (1) of Section 469:- Power of Central Government to Make Rules
The
section 132 in brief discuss about the power of the Central government to
constitute the NRFA and the functions to be performed by the NFRA, its
constitution (appointment of chairperson and members), powers to investigate
and make orders, provisions of appeals and the maintenance of book of accounts
by the authority, audit of the accounts of the authority by Comptroller and
Auditor-General of India, and reporting by the authority to the central
government, while section 139 is related to the provisions of appointment of
auditor and matters incidental thereto,
In
pursuance of the provisions of section 469, the central government has
introduced the NFRA Rule, 2018.
What
is the function of NFRA?
•
Establishing
high quality standards of accounting and auditing
•
Over
viewing accounting functions performed by auditor and body corporates
•
Maintain
details of particulars of auditors appointed in the companies and bodies
corporate specified in rule 3;
•
Recommend
accounting and auditing standards for approval by the Central government;
•
Monitor
and enforce compliance with accounting standards and auditing standards;
•
Oversee
the quality of service of the professions associated with ensuring compliance
with such standards and suggest measures for improvement in the quality of
service;
•
Promote
awareness in relation to the compliance of accounting standards and auditing
standards, auditors’ responsibilities, audit quality and such other matters
through education, training, seminars, workshops, conferences and publicity;
•
Power
to investigate and report its findings
to the Central Government
•
Co-operate
with national and international organizations of independent audit regulators
in establishing and overseeing adherence to accounting standards and auditing
standards; and
•
Perform
such other functions and duties as may be necessary or incidental to the
aforesaid functions and duties.
Which
companies are governed by NFRA?
•
All
Listed Company includes companies listed in India or Outside India and
•
Unlisted
public companies having paid-up capital of not less than rupees 500 crores or
•
Companies
having annual turnover of not less than rupees 1000 crores or
•
Companies
having in aggregate, outstanding loans, debentures and deposits of not less
than rupees 500 crores as on the 31st March of immediately preceding financial
year.
•
Insurance
companies, banking companies, companies engaged in the generation or supply of
electricity,
•
Companies
governed by any special Act for the time being in force
•
Bodies
corporate incorporated by an Act in accordance with clauses (b), (c), (d), (e)
and (f) of sub-section (4) of section 1 of the Companies Act 2013
•
Companies
as classified by the Central Government
•
Body
Corporate registered outside India which is Associate or Subsidiary of company
registered in India (as referred in above clauses), having income or net worth
of such subsidiary or associate company exceeds twenty per cent. of the
consolidated income or consolidated net worth of such company or the body corporate
Which
forms/ Compliances to be done by the eligible companies?
·
Every
body corporate excluding the company incorporated under Companies Act, 2013 or
previous law and also excluding the one governed under this rule shall, within
15 days of appointment of an auditor under sub-section (1) of section 139,
inform the Authority in Form NFRA-1, the particulars of the auditor
appointed by such body corporate
·
Provided
that a body corporate registered outside India which is Associate or Subsidiary
of company registered in India shall provide details of appointment of its
auditor in Form NFRA-1.
·
The
companies that are in existence as on the date of commencement of these rules
and are not covered under these rules, are required to file Form NFRA-01
i.e. Notice to the authority by a body corporate regarding its auditor, within
30 days of commencement of these rules with the Authority
·
Just
like once
xbrl always xbrl, If a company ceases to be governed under this rule either
because it ceases to be a listed company or because the limit as specified for
Paid up, Turnover and aggregate of Loans, debentures and deposits declines, it
shall continue to be governed by the Authority for a period of three years
even after such cessation
What
is the last date to file annual return?
In addition to performing Annual
KYC for each Director in the month of April every year, the Auditors of
each applicable company/ entity to file a return with the Authority on or
before 30th April every year.
What
is the punishment in case of Non Compliances in this regard?
On violation by a company or any
officer of a company or an auditor or any other person of the provisions of
these rules provisions of section 450 of the Act will apply which says that;
If a company or any officer of a company or any
other person contravenes any of the provisions of this Act or the rules made
thereunder, or any condition, limitation or restriction subject to which any
approval, sanction, consent, confirmation, recognition, direction or exemption
in relation to any matter has been accorded, given or granted, and for which no
penalty or punishment is provided elsewhere in this Act, the company and every
officer of the company who is in default or such other person shall be punishable
with fine which may extend to ten thousand rupees, and where the contravention
is continuing one, with a further fine which may extend to one thousand rupees
for every day after the first during which the contravention continues.
What
is the manner of enforcement of orders passed in disciplinary proceedings?
(1) The auditor
in case of monetary penalty under rule 11 shall deposit the amount of penalty
with the Authority within 30 days of
the order, or in case of appeal against the order of the Authority, it shall
deposit 10% of the amount of the
monetary penalty with the Appellate Tribunal.
(2) If, within 30 days of the order passed under rule
11, the auditor neither pays the penalty nor appeals against the order, the
Authority shall, without prejudice to any other action, inform about such
non-compliance to every company or body corporate (including those not covered
by rule 3) in which the auditor is functioning as auditor and every such company
or body corporate shall appoint a new auditor in accordance with the provisions
of the Act.
Conclusion
To conclude all, it is hereby
suggested to abide by the rules formulated by the authority, otherwise the
person in default can undergo severe punishment like imposing penalty and an
order debarring the auditor from practice or provisions of section 450 of the
Act shall apply.
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