National Financial Reporting Authority

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    Recently, the National Financial Reporting Authority(NFRA ) compiled a provisional database of companies and their auditors.

    Need

    • Auditing Requires Complete Independence
      • Auditor has been entrusted with the responsibility to ensure the truthfulness and correctness of financial statements before these are presented to its various stakeholders.
        • However, there is an inherent conflict of interest in the auditing process as the auditee company also pays the auditor. 
    •  An Independent Regulator is needed 
      • The need for establishing NFRA has arisen in the wake of accounting scams like PNB scam and other financial scams and frauds in the country, therefore, it was proposed to establish independent regulators for enforcement of auditing standards and ensuring the quality of audits to strengthen the independence of audit firms, quality of audits.

    National Financial Reporting Authority

    • It is a regulatory body constituted on 01st October 2018 by the Government of India under Sub Section (1) of section 132 of the Companies Act, 2013 to oversee compliance with Accounting and Auditing Standards by companies that can be described as Public Interest Entities (PIEs). 

    Composition of the NFRA

    • The Companies Act requires the NFRA to have a chairperson who will be appointed by the Central Government and a maximum of 15 members.

    Functions and Duties

    • Recommend accounting and auditing policies and standards to be adopted by companies 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;
    • Protect the public interest and the interests of investors, creditors and others associated with the companies or bodies.

    Jurisdiction of NFRA

    • The jurisdiction of NFRA for investigation of Chartered Accountants and their firms under section 132 of the Act would extend to listed companies and large unlisted public companies
      • The NFRA is tasked to investigate audit of Listed Companies and Unlisted companies with net worth not less than Rs 500 crore or paid-up capital of not less than Rs 500 crore or annual turnover not less than Rs 1,000 crore as on March 31 of immediately preceding financial year, and companies having securities listed outside India. 
      • The Centre further has the power to refer the entities for investigation where public interest would be involved. The rest are regulated by ICAI.
      • The inherent regulatory role of ICAI as provided for in the Chartered Accountants Act, 1949 shall continue in respect of its members in general and specifically with respect to audits pertaining to private limited companies, and public unlisted companies .

    Significance 

    • With the constitution of NFRA, India is now eligible to become a member of the International Forum of Independent Audit Regulators (IFIAR), which was denied until now for want of an independent audit oversight body in the country
    • It will attract foreign/domestic investments and enhance economic growth.

    International Forum of Independent Audit Regulators (IFIAR)

    • Established in Paris in 2006 by independent audit regulators from 18 jurisdictions, IFIAR has grown to 54 Members around the world.
    • IFIAR’s mission is to serve the public interest, including investors, by enhancing audit oversight globally. 
    • The overall objective is to:
      • Share knowledge of the evolving audit environment and the practical experience of independent audit regulatory activity.
      • Promote collaboration and consistency in regulatory activity.
      • Provide a platform for dialogue with other international organizations interested in audit quality.

    Listed Company

    • A company whose shares are traded on an official stock exchange. It must adhere to the listing requirements of that exchange, which may include how many shares are listed and a minimum earnings level.

     Unlisted Company

    • These are companies that are not listed on the stock exchange, so they are privately owned. Since they are not on the list, they do not have the opportunity to raise funds.

    Source: PIB