Welcome to a New regulator in Accounting and Auditing Profession - NFRA

1. National Financial Reporting Authority Rules, 2018
MCA approved notification on 13th November 2018
Publication in Official Gazette awaited
CMA Raman Khanna
khanna1975@yahoo.co.in

2. The PNB wake-up call, Satyam Scam, Enron fallout and many more……
 The discovery of multi-crore fraud allegedly committed at the Punjab National Bank appears to be a trigger.
 Rs. 13,000 Crore Punjab National Bank fraud perpetrated by certain companies that surfaced in February,2018
has raised questions about the effectiveness of auditing in banks.
 Public sector banks (PSBs) have a variety of audits done by CAs including statutory, branch, concurrent, and
stock audit - yet the auditors of PNB failed to track the fraud.
 Despite paying such hefty sums to the auditors, bank frauds continue to take place.
 The fraud has raised questions regarding the failure of internal and external auditors to notice the guarantees
being issued to Modi entities.
 The rising non-performing assets of banks have also raised questions about the auditors’ failure to review
asset quality carefully and insist on provisions for bad loans.
 The PNB fraud finally forced the government’s hand on setting up the NFRA.
https://www.thehindubusinessline.com/opinion/nfra-starts-off-on-the-wrong-foot/article23357050.ece

3. Auditing Expenses(In Crores)
BANK FY 2017 FY 2016
SBI 216 197
PNB 67 69
BOB 57 58
BOI 89 67
CANARA BANK 63 59
Source: Stand alone financial statements of banks
https://www.thehindubusinessline.com/opinion/nfra-starts-off-on-the-wrong-foot/article23357050.ece
Auditing expenses of various banks during FY 2017 and FY 2016

4. NFRA is a Quasi Judicial Body established to regulate
aspects related to accounting and auditing
An Independent Regulator to regulate the
Accounting and Auditing Profession
NFRA shall have same powers as a civil court under
the Code of Civil Procedure, 1908
The idea is inspired by the Sarbanes Oxley Act, 2002 of the US and is in
line with Internationally accepted global practices like in US, UK and
China
National
Financial
Reporting
Authority
(NFRA)

5. Regulatory framework governing NFRA
Companies Act, 2013 - Section 132 of the Act provides for the constitution of NFRA
by the Central Government to provide for matters relating to accounting and
auditing – Notified from various dates
Companies (Amendment) Act, 2017
The NFRA (Manner of Appointment and other Terms and Conditions of Service of
Chairperson and Members) Rules, 2018 – Notified on 21st March 2018
National Financial Reporting Authority Rules 2018 – Issued on 13-11-2018.
Publication in Official Gazette is awaited

6. Section and Sub-Section of
Companies Act, 2013
Effective Date
132(3) and 132(11) 21st March 2018
132(1) and 132(12) 1st October 2018
132(2), 132(4), 132(5), 132(10)
132(13), 132(14) and 132(15)
24th October 2018
132(6) to 132(9)
Omitted by the Companies
(Amendment ) Act,2017

7. Companies Act 2013 - Sec. 132
(1) Central Govt. is empowered to constitute a NFRA to provide for matters relating to accounting and auditing
standards under this Act.
ROLE OF NFRA (2) NFRA shall:-
(a) make recommendations on the formulation & laying down of accounting and auditing policies
and standards for adoption by:-
• companies or
• class of companies or
• their auditors,
(b) monitor and enforce the compliance with accounting standards and auditing standards
(c) Oversee the quality of service of the professions associated with ensuring compliance with such
standards, and suggest measures required for improvement in quality of service and such other
related matters as may be prescribed;
(d) perform such other functions relating to clauses (a), (b) and (c) as may be prescribed.

8. COMPOSITION OF NFRA
(3) The National Financial Reporting Authority shall consist of:-
• a chairperson, to be appointed by the Central Government and
• members not exceeding fifteen consisting of part-time and full-time members
The chairperson and members, who are in full-time employment with NFRA shall not be associated with
any audit firm (including related consultancy firms) during the course of their appointment and two years
after ceasing to hold such appointment.

9. POWERS OF NFRA
(4) the National Financial Reporting Authority shall have the power:-
(a) to investigate, either suo moto or on a reference made by Central Government, for such class of bodies
corporate or persons, into the matters of professional or other misconduct committed by any member or firm of
chartered accountants, registered under the Chartered Accountants Act, 1949:
(b) powers shall be same like a civil court under the Code of Civil Procedure, 1908, while trying a suit, in
respect of the following matters, namely:—
(i) discovery and production of books of account and other documents, at such place and at such time as
may be specified by the National Financial Reporting Authority;
(ii) summoning and enforcing the attendance of persons and examining them on oath;
(iii) inspection of any books, registers & other documents of any person referred in clause (b) at any place;
(iv) issuing commissions for examination of witnesses or documents;
Contd……

10. POWERS OF NFRA
(c) to make order for (If professional or other misconduct is proved):-
(A) imposing penalty of—
(I) Individual – Minimum Rs. one lakh, which may extend to five times of the fees received
(II) Firms – Minimum Rs. five lakh, which may extend to ten times of the fees received,
(B) debarring member / firm from from practice as member of the ICAI referred u/s 2(1)(e) of the Chartered
Accountants Act, 1949 for a minimum period of 6 months which may extend up to ten years as may be
decided by the NFRA.
Explanation—"professional or other misconduct" shall have the same meaning assigned to it under section
22 of the Chartered Accountants Act, 1949.
Proviso to Sec 4(a) – No other Institute or body shall initiate / continue any proceedings in such matters of
misconduct where the NFRA has initiated an investigation under this section;
(5) Aggrieved persons may make appeal to the Appellate Authority constituted by the CG for hearing
appeals against any order of NFRA.

11. (6) Omitted
(7) Omitted
(8) Omitted
(9) Omitted
OTHER MISC PROVISIONS
(10) NFRA shall meet at such times and places and shall observe such rules of procedure in regard to the transaction of
business at its meetings in such manner as may be prescribed.
(11) Central Government may appoint a secretary and such other employees as it may consider necessary for the
efficient performance of functions by the National Financial Reporting Authority under this Act and the terms and
conditions of service of the secretary and employees shall be such as may be prescribed.
(12) H.O. of the NFRA shall be at New Delhi and the National Financial Reporting Authority may, meet at such other
places in India as it deems fit.
(13) The NFRA shall maintain such books of account and other books in relation to its accounts in such form and in
such manner as the Central Government may, in consultation with the Comptroller and Auditor-General of India
prescribe.

12. National Financial Reporting Authority Rules' 2018
Rule-3 - Classes of companies and bodies corporate governed by NFRA.-
(1) NFRA shall have power to monitor and enforce compliance with accounting standards and auditing standards,
oversee the quality of service u/s 132(2) or undertake investigation u/s 132(4) of such section of the auditors of the
following class of companies and bodies corporate, namely:-
(a) Listed Companies (In India or Outside India)
(b) Unlisted public companies–
I. Paid up capital not less than Rs. 500 crores or
II. annual turnover of not less than Rs. 1,000 Crores
III. Outstanding loans, debentures and deposits of not less than Rs. 500 crores
as on the 31st March of immediately preceding financial Year;

13. (c) Insurance companies, banking companies, companies engaged in generation or supply of electricity, companies
governed by any special Act or bodies corporate incorporated by an Act in accordance with clauses (b), (c), (d), (e) and (f)
of Sec 1(4) of the CA Act.
(d) any body corporate or company or person, or any class thereof on a reference made by central Government in public
interest
(e) a body corporate incorporated or registered outside India, which is a subsidiary or associate company of any
company or body corporate incorporated or registered in India as referred to in clauses (a) to (d) - if the income or
networth of such subsidiary or associate company exceeds 20% of the consolidated income or consolidated net worth.
Information of Particulars of Auditors to NFRA
(2) Every existing body corporate other than a Co. shall inform the particulars of the auditor in Form NFRA-1 to the
Authority – within thirty days of the commencement of these rules
(3) Every existing body corporate other than a Co. shall inform the particulars of the auditor appointed u/s 139(1) of CA
2013 in Form NFRA-1 to the Authority – within 15 days of appointment
(4) If any of the Co. / boyd corporate ceases to be listed or its paid-up capital or turnover or aggregate of loans,
debentures and deposits falls below the limits – It shall continue to be governed by NFRA for a period of 3 Years.

14. Rule-4 - Functions and duties of the Authority.-
(1) The Authority shall protect the interest of:
• public
• investors,
• creditors and
• others associated with the companies or bodies corporate
by establishing high quality standards of accounting and auditing and exercising effective oversight of accounting
functions performed by the companies and bodies corporate and auditing functions performed by auditors.
(2) In particular:-
(a) maintain details of particulars of auditors appointed in the companies and bodies corporate
(b) recommend accounting standards and auditing standards for approval by the Central Government;
(c) monitor and enforce compliance with accounting standards and auditing standards;

15. (d) 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,
(e) promote awareness in relation to the compliance of accounting standards and auditing standards;
(f) co-operate with national & international organizations of independent audit regulators in establishing and
overseeing adherence to accounting standards and auditing standards; and
(g) perform such other functions and duties as may be necessary or incidental to the aforesaid functions and duties.
Rule-5 - Annual return.
Every auditor referred under rule 3 shall file a return with the Authority on or before 30th April every year

16. Rule-6 - Recommending accounting standard
and auditing standards:-
(1) the Authority:-
(a) shall receive recommendations from the ICAI on
proposals for new accounting standards or auditing
standards or for amendments to existing accounting
standards or auditing standards;
(b) may seek additional information from the ICAI on the
recommendations received under clause (a), if required.
(2) Authority shall consider the recommendations and
additional information in such manner as it deems fit
before making recommendations to the central Govt.
Rule-7 - Monitoring and enforcing
compliance with accounting standards
(1) Authority may review financial statements of such
company / body corporate, and may direct such company /
body corporate / its auditor by a written notice, to provide
further information / explanation / any relevant
documents
(2) Authority may require personal presence of the officers
of the company / body corporate / auditor for seeking
additional information or explanation in connection with
the review of the financial statements
(3) Authority shall publish its findings of non-compliances
on its website
(4) If Authority finds or has reason to believe that any
accounting standard has been violated, it may decide on
the further course of investigation or enforcement action
through its concerned Division.

17. 8. Monitoring and enforcing compliance with auditing standards.-
(1) the Authority may: -
(a) review working papers (including audit plan / audit documents) and communications related to the audit.
(b) evaluate the sufficiency of the quality control system of the auditor and the manner of documentation of the
system by the auditor and
(c) perform such other testing of the audit / supervisory and quality control procedures of the auditor
(2) Authority may require an auditor to report on its governance practices and internal processes designed to promote
audit quality, protect its reputation and reduce risks including risk of failure of the auditor and may take such action on the
report as may be necessary.
(3) Authority may seek additional information or may require the personal presence of the auditor for seeking additional
information or explanation in connection with the conduct of an audit.
(4) Authority shall perform its monitoring & enforcement activities through its officers or experts with sufficient
experience in audit of the relevant industry.
Contd……

18. 8. Monitoring and enforcing compliance with auditing standards.-
(5) Authority shall publish its findings relating to non-complainces on its website and in such other manner
(6) Authority shall not publish proprietary or confidential information, unless it is against public interest
(7) Authority may send a separate report containing proprietary or confidential information to Central Govt.
(8) If the Authority finds that any law or professional or other standard has or may have been violated by an auditor, it
may decide on the further course of investigation or enforcement action through its concerned Division.

19. 9. Overseeing the quality of service and suggesting measures for improvement
(1) On the basis of its review, the Authority may direct an auditor
 to take measures for improvement of audit quality including
 changes in their audit processes, quality control, and audit reports and
 specify a detailed plan with time-limits
(2) Auditor is duty bound to do the necessary improvements and send a report thereon to the Authority
(3) Authority shall monitor the improvements made by the auditor and take such action as it deems fit
(4) Authority may:
 refer cases with regard to overseeing the quality of service of auditors to the Quality Review Board (QRB)
constituted under the Chartered Accountants Act, 1949 or
 call any report or information in respect of such auditors / companies / bodies corporate from such Board (QRB)
(5) Authority may take the assistance of experts for its oversight and monitoring activities.

20. 10. Power to investigate.- (1) Where the Authority has:
(a) received any reference from C.G. for investigation into any matter of professional or other misconduct u/s132(4)
(b) decided to undertake investigation into any matter on the basis of its compliance or oversight activities, or
(c) decided to undertake suo motu investigation into any matter of professional or other misconduct, it shall forward the
matter to its Division dealing with enforcement for carrying out investigation and other action.
(2) lf, during the investigation, the Authority has evidence to believe that any company / body corporate has not complied
with the requirements under the Act or rules which involves / may involve fraud amounting to Rs. 1 Cr or more, it shall
report its findings to Central Govt.
(3) On the commencement of these rules-
(a) the action in respect of cases of professional or other misconduct against auditors of companies referred to in rule 3
shall be initiated by Authority and no other institute or body shall initiate any such proceedings
Note:- If NFRA has initiated any proceedings, no other institute or body shall initiate or continue any proceedings
(b) the action in respect of other “professional or other misconduct” shall continue to be dealt by ICAI

21. 11. Disciplinary proceedings.- (1) Based on the:-
 reference received from Central Govt. or
 findings of its monitoring or
 enforcement or oversight activities, or
 on the basis of material otherwise available on record,
if the Authority believes that sufficient cause exists to take actions permissible u/s 132(4) it shall refer the matter to the
concerned division, which shall issue a show-cause notice to be issued to the auditor.
(2) The show-cause notice shall be in writing, and shall state:-
(a) the provisions of the Act / rules under which it has been issued;
(b) the details of alleged facts;
(c) the details of evidence in support of the alleged facts;
(d) the provisions of the Act, rules / accounting standards / auditing standards violated, or the manner in which
the public interest is allegedly affected;
(e) actions that the Authority proposes to take / directions it proposes to issue if allegations are established;

22. (f) the time limit and manner in which auditor is required to respond to the show-cause notice;
(g) the consequences of failure to respond to the show-cause notice; and
(h) the procedure to be followed for disposal of the show-cause notice.
(4) Manner of sending show-cause notice:
(a) by sending it to the auditor at the address provided by him or provided by the ICAI by regd. post with AD or
(b) by email to the email address of the auditor provided by him or provided by ICAI.
(5) The Division shall dispose of the show-cause notice within a period of 90 days of the assignment
(6) The order disposing of a show-cause notice may provide for-
(a) no action
(b) caution
(c) action for imposing penalty u/s 132(4)(c)(A) or debarring the auditor from engaging u/s 132(4)(c)(B) or both.

23. (7) The order passed under sub-rule (6) shall not become effective until thirty days have elapsed from the date of issue of
the order unless the Division states otherwise in the order along with the reason for the same.
(8) The order passed shall be served on the auditor with a copy to:
(i) in all cases to - (a) the Central Govt. and (b) the ICAI;
(ii) in the case of a company Govt. owned Company to the CAG of India;
(iii) in the case of a listed company to the SEBI
(iv) in the case of a bank or a NBFC to the RBI
(v) in the case of an insurance company to the IRDAI
(vi) in case the auditor is resident outside India to concerned regulator of such country
Same order shall be published on the website of the Authority.

24. 12. Manner of enforcement of orders passed in disciplinary proceedings.-
(1) Where order passed under rule 11 relates to imposition of a monetary penalty on any auditor, the auditor shall deposit
amount of penalty with the Authority within thirty days of the order:
If the auditor prefers an appeal it shall deposit 10% of the amount of the monetary penalty with the Appellate Tribunal.
(2) lf, the auditor neither pays the penalty nor appeals against the order, the Authority shall inform about such non-
compliance to every company or body corporate 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.
(3) Where order imposes a penalty or debars the auditor from practice, it shall be sent to every company or body
corporate in which the auditor is functioning as auditor.
(4) Where the order debars the auditor from practice the order shall be sent to every company or body corporate in
which the auditor is functioning as auditor and every such company or body corporate shall appoint a new auditor
13. Punishment in case of non-compliance.- lf a company / any officer of a company / an auditor
or any other person contravenes any of the provisions of these rules, they shall be punishable u/s 450 of the Act.
As per Sec 450 (Punishment Where No Specific Penalty or Punishment is Provided) - Fine of Rs. 10,000/- and if default
continues Rs. 1,000/- per day

25. OTHER MISC PROVISIONS
14. Role of chairperson and full-time members.-
All matters related to, investigation, monitoring, enforcement and disciplinary proceedings shall be examined and decided
by the chairperson or any one or more of the full-time members, acting through one of the Divisions.
15. Advisory committees, study groups and task forces.-
For effective performance of its functions the Authority may constitute advisory committees, study groups & task forces.
16. Financial reporting advocacy and education.-
The Authority shall take suitable measures for the promotion of awareness and significance of accounting standards,
auditing standards, auditors' responsibilities, audit quality and such other matters through education, training, seminars,
workshops, conferences and publicity.
17. Confidentiality and security of information.-
(1) The Authority and all persons and organisations associated with it shall maintain complete confidentiality and security
of the information provided to them for the purpose of the work of the Authority.
(2) The Authority may enter into such contractual arrangements as may be necessary in order to maintain complete
confidentiality and security of the information.

26. 18. Avoidance of conflict of interest.-
(1) NFRA shall not enter into any contract, arrangement or relationship or participate in any event that may, or is likely to
be perceived to, interfere with its ability to perform its functions and duties in an effective, fair and reasonable manner.
(2) In particular the Authority or any person associated with it shall not receive any funds, assets, donations, favours, gifts
or sponsorships from any source other than the Central Govt. and shall not enter into any liabilities, obligations or
commitments except as permitted by the Central Government.
19. International associations and international assistance.-
(1)The Authority may become a member of regional or international associations of independent audit regulators and
standard-setters on such terms as it deems fit.
(2) The Authority may provide assistance to, or receive assistance from, foreign independent audit regulators in
investigation of an auditor in accordance with Indian laws on such terms as it deems fit.

27. National Financial Reporting Authority (Manner of Appointment and other Terms and
Conditions of Service of Chairperson and Members) Rules, 2018
Brief details:
Rule-3 - Composition of Authority
Rule-4 - Manner of Appointment
Rule-5 - Medical Fitness
Rule-6 - Resignation
Rule-7 - Removal from Office
Rule-8 - Procedure for inquiry of misbehavior or incapacity of the chairperson or a member
Rule-9 - Term of Office
Rule-10 - Vacancy, etc.
Rule-3 - Composition of Authority
The Authority shall consist of the following persons to be appointed by the Central Govt. namely:-
(a) a chairperson;
(b) 3 full time members and
(c) 9 part time members.

28. ICAI’s role Post NFRA formation
 ICAI role will continue in general and specifically with respect to audits pertaining to:
 Private Limited Companies
 Public Listed Companies below the threshold limit
 ICAI will continue its advisory role and recommend NFRA on accounting and auditing standards.

29. Challenges and Way forward……..
 Before NFRA many institutions were formed like SFIO under the Companies Act, 2013 and BIFR under SICA Act, 1985
and their success is not upto the mark. However SICA is repealed and new authority has come up now i.e. Insolvency
and Bankruptcy Code, 2016.
 Being a quasi judicial body, the institution shall work more like a court only similar to other regulators in India like
Debt Recovery Tribunal (DRT), NCLT, SFIO and SEBI
 NFRA is not meant to replace the disciplinary jurisdiction of the ICAI. Finance Minister Arun Jaitley
 The success of NFRA shall lies in the equal participation from ICAI. Their east west approach in regulating audit
profession may end up nowhere.
 NFRA should have high quality intellectuals and experts in accounting, auditing and the disciplinary mechanism to get
the desired aims.
 Would NFRA be able to deal with Auditor’s voluntary exists during last few months ? Like Price Waterhouse resign as
statutory auditor of Atlanta Ltd, and of Vakrangee Ltd. Deloitte, Haskins & Sells had resigned as statutory auditor of
Manpasand Beverages Ltd.

30. The ppt is prepared with an effort to simplify the contents and strengthen understanding and is meant
to share the knowledge with professional colleagues, students, academicians and interested public.
For any feedbacks, suggestions please drop an e-mail @ khanna1975@yahoo.co.in