The National Financial Reporting Authority

In one line

The National Financial Reporting Authority is the statutory regulator of accounting and auditing standards, and it can investigate an auditor, fine him and bar him from auditing for up to ten years.

In exam wording: section 132(1) empowers the Central Government to constitute a National Financial Reporting Authority to provide for matters relating to accounting and auditing standards; section 132(2) gives it four functions; section 132(4) gives it power to investigate professional or other misconduct by chartered accountants, the powers of a civil court, and, on proof, power to impose penalties and to debar; and section 132(5) gives an appeal to the Appellate Tribunal.

Why the law has this at all

Until 2013 the accountancy profession in India was regulated almost entirely by itself. The Institute of Chartered Accountants of India set the standards, admitted the members and disciplined them.

Self-regulation works while the profession's interest and the public's coincide. It comes under strain when a large audit failure occurs, because the body deciding whether the auditor was at fault is composed of that auditor's colleagues and competitors, and because the loss falls on investors who have no voice in it.

So section 132 creates an outside regulator with three deliberate features. It is statutory, so its standards bind. Its investigative jurisdiction ousts the professional institutes once it starts, so there cannot be two inquiries with different answers. And its sanctions reach beyond a reprimand to money and debarment, which is what actually affects an audit firm.

The independence provisions in section 132(3) are the other half of the design. A regulator staffed by people who are simultaneously partners in audit firms would be no improvement, so the Act requires declarations of no conflict and a two year cooling off period after leaving.

Some words this chapter uses

Accounting standards are the standards notified under section 133. Auditing standards govern how an audit is carried out. Professional or other misconduct takes its meaning from section 22 of the Chartered Accountants Act 1949. To debar is to prohibit a person from practising in a defined way. Suo motu means on its own initiative. The Appellate Tribunal is the National Company Law Appellate Tribunal.

Constitution: section 132(1) and (1A)

Section 132(1). The Central Government may, by notification, constitute a National Financial Reporting Authority to provide for matters relating to accounting and auditing standards under this Act.

Section 132(1A). The Authority shall perform its functions through such divisions as may be prescribed.

The four functions: section 132(2)

Notwithstanding anything contained in any other law for the time being in force, the Authority shall:

• (a) make recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or classes of companies or their auditors;
• (b) monitor and enforce the compliance with accounting standards and auditing standards in such manner as may be prescribed;
• (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; and
• (d) perform such other functions relating to clauses (a), (b) and (c) as may be prescribed.