The Central Government has constituted the National Financial Reporting Authority (NFRA) under section 132 of the Companies Act, 2013 w.e.f. October 01, 2018. Following this, the functions and duties of the NFRA as specified in section 132 have been made applicable w.e.f October 24, 2018. Now, the Government has released the National Financial Reporting Authority Rules, 2018. The Rules have been summarized below:
1. The Rules shall be applicable on certain companies [(i) Companies listed in India or outside India; Unlisted public companies having: a) paid-up share capital≥ Rs. 500 cr.; or b) annual turnover ≥ Rs. 1,000 cr.; or c) aggregate of outstanding loans, debentures & deposits ≥ Rs. 500 cr. The above thresholds shall be asssessed as on 31 March of immediately preceding financial year. (ii) Insurance companies, banking companies, companies engaged in the generation or supply of electricity, companies governed by any special Act for the being in force or bodies corporate incorporated by an Act. (iii) Companies as referred by the Central Government suo-motu to NFRA in the public interest; and (iv) Companies incorporated outside India, being subsidiary or associate or any company incorporated in India and covered above, if the income or net worth of such companies exceeds 20% of the consolidated income or net worth, as the case may be.] If any of these companies ceases to meet any condition in future periods, it shall shall continue to be covered for a period of 3 years from the period in which it ceases to meet the above conditions.
2. NFRA shall have power to monitor and enforce the compliance with Accounting and Auditing Standards by the above class of companies, and to supervise the quality of auditing by auditors of such companies.
3. It may review the financial statements of above companies to check the compliance with Accounting Standards (AS). In case of any non-compliance by any company, it shall publish the same on its website and may take further actions against the officers of the companies, if required.
4. In order to verify compliance with Auditing Standards and to check the quality of auditing, NFRA may review the audit plan and audit documents, evaluate the sufficiency of control system implemented by the auditors of above companies to promote audit quality and to reduce audit risks, etc. In case of any non-compliance or flaws in audit procedures, NFRA shall publish the same on its website and may take further actions against the auditors, if required.
5. Only the NFRA shall initiate any action against the auditors of the above classes of companies for any professional or other misconduct. So, the Institute of Chartered Accountants of India (ICAI) or any other body shall not take any actions for the same misconduct. However, ICAI shall continue with the power of taking action for any professional or other misconduct by auditors of companies not covered by these Rules.
6. On the basis of its review, NFRA may direct an auditor to improve the quality of audit by making requisite changes to his (her) audit processes, quality control and audit documentation. In such case, the auditor is required to send a report to NFRA explaining the changes made for improvement.
7. NFRA may impose penalty on auditors, if found guilty of any misconduct, or may debar the auditor or auditor firm from engaging himself or itself from practice as member of ICAI for a minimum period of 6 months or for such higher period not exceeding 10 years. The penalty may vary from Rs. 1 lakh to five times of the fees received, when the auditor is an individual, from Rs. 5 lakh to 10 times of the fees received, when the auditor is a firm.
8. In future, ICAI shall recommend new Accounting and Auditing Standards or any amendments to existing Standards to NFRA for further recommendation to the Central Government.