The National Financial Reporting Authority

Learn the four verbs: recommend, monitor and enforce, oversee, and perform. Clause (a) is advisory, because standards are notified by the Central Government under section 133; the Authority recommends, it does not notify. Clauses (b) and (c) are where its real work lies.

Composition and independence: section 132(3)

The Authority shall consist of:

• a chairperson, who shall be a person of eminence having expertise in accountancy, auditing, finance or law, appointed by the Central Government; and
• such other members not exceeding fifteen, consisting of part-time and full-time members, as may be prescribed.

Three provisos, and the third is the important one.

The terms and conditions and manner of appointment shall be as prescribed.

The chairperson and members shall make a declaration to the Central Government in the prescribed form regarding no conflict of interest or lack of independence in respect of their appointment.

And the chairperson and members in full-time employment with the Authority shall not be associated with any audit firm, including related consultancy firms, during the course of their appointment and for two years after ceasing to hold it.

Note the reach of that third proviso: it covers related consultancy firms, not only audit firms, and the bar runs for two years after office ends.

Section 132(3A). Each division shall be presided over by the Chairperson or a full-time Member authorised by the Chairperson.

Section 132(3B). There shall be an executive body consisting of the Chairperson and the full-time Members, for the efficient discharge of its functions under sub-section (2) other than clause (a) and under sub-section (4). So the executive body does the monitoring and enforcement but not the recommending of standards, and not the adjudication of misconduct.

Investigation and powers: section 132(4)

Notwithstanding anything contained in any other law, the Authority shall:

(a) The power to investigate

Have power to investigate, either suo motu or on a reference made to it by the Central Government, for such class of bodies corporate or persons as may be prescribed, into matters of professional or other misconduct committed by any member or firm of chartered accountants registered under the Chartered Accountants Act 1949.

The proviso is the ouster, and it is the most examinable line in the section:

no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the National Financial Reporting Authority has initiated an investigation under this section.

So once the Authority starts, the Institute of Chartered Accountants of India must stop, and may not begin. There is one investigation, not two.

(b) The powers of a civil court

The same powers as are vested in a civil court under the Code of Civil Procedure 1908 while trying a suit, in respect of:

• (i) discovery and production of books of account and other documents, at such place and time as the Authority may specify;
• (ii) summoning and enforcing the attendance of persons and examining them on oath;
• (iii) inspection of any books, registers and other documents of any person, at any place; and
• (iv) issuing commissions for examination of witnesses or documents.

(c) The sanctions

Where professional or other misconduct is proved, power to make an order for:

(A) imposing a penalty of:

• (I) not less than one lakh rupees, but which may extend to five times of the fees received, in the case of individuals; and
• (II) not less than five lakh rupees, but which may extend to ten times of the fees received, in the case of firms; and

(B) debarring the member or the firm from:

• I. being appointed as an auditor or internal auditor, or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or
• II. performing any valuation as provided under section 247,

for a minimum period of six months, or such higher period not exceeding ten years as the Authority may determine.

Four numbers to memorise: one lakh and five times for an individual; five lakh and ten times for a firm; and debarment of six months to ten years.

Note that debarment reaches valuation under section 247 as well as audit. A firm barred from auditing cannot simply move into valuation work.

The Explanation provides that "professional or other misconduct" shall have the same meaning as under section 22 of the Chartered Accountants Act 1949. So the Authority applies the profession's own definition of misconduct, while taking the decision out of the profession's hands.

Appeal: section 132(5)

Any person aggrieved by any order of the Authority under clause (c) of sub-section (4) may prefer an appeal before the Appellate Tribunal, in such manner and on payment of such fee as may be prescribed.

Note two things. The appeal lies against orders under clause (c) only, that is, the penalty and debarment orders, not against the decision to investigate. And it goes to the National Company Law Appellate Tribunal, which is where appeals from the National Company Law Tribunal also go.

Sub-sections (6), (7), (8) and (9) were omitted by the Companies (Amendment) Act 2017. They had provided for a separate appellate authority, which the amendment replaced with the appeal to the Appellate Tribunal in sub-section (5).

Procedure and staff: section 132(10) to (15)

Section 132(10). The Authority shall meet at such times and places and observe such rules of procedure in regard to the transaction of business at its meetings as may be prescribed.

Section 132(11). The Central Government may appoint a secretary and such other employees as it considers necessary.

The remaining sub-sections deal with the head office at New Delhi with offices elsewhere, the maintenance of books of account and other records in the prescribed form, their audit by the Comptroller and Auditor General of India, and the laying of the audited accounts together with the audit report and the annual report before each House of Parliament.

That last point is worth a sentence in an answer: the regulator is itself audited by the Comptroller and Auditor General and reports to Parliament, which is what makes it accountable rather than merely powerful.

A worked example

A large audit failure. The financial statements of Amravati Infra Limited for 2027 are found to have concealed borrowings of nine hundred crore rupees. Its auditor is a firm of chartered accountants which received audit fees of two crore rupees, and the engagement partner is a member of the Institute.

Who investigates. The Authority may act suo motu or on a reference by the Central Government, for such class of bodies corporate or persons as may be prescribed. It opens an investigation into the professional or other misconduct of the firm and the partner.

What the Institute may do. Nothing further. By the proviso to section 132(4)(a), no other institute or body shall initiate or continue any proceedings in those matters of misconduct once the Authority has initiated its investigation.

How it investigates. It exercises the powers of a civil court under the Code of Civil Procedure 1908: it orders discovery and production of the audit files at a place and time it specifies, summons the partner and examines him on oath, inspects the firm's books and registers, and issues commissions to examine witnesses.

The sanction on the firm. Misconduct being proved, the penalty is not less than five lakh rupees and up to ten times the fees received. The fees were two crore rupees, so the ceiling is twenty crore rupees.

The sanction on the partner. As an individual, not less than one lakh rupees and up to five times the fees received.

Debarment. The Authority may additionally debar the firm and the member from being appointed as auditor or internal auditor, from undertaking any audit or internal audit of any company or body corporate, and from performing any valuation under section 247, for not less than six months and not more than ten years.

Appeal. The firm, being aggrieved by an order under clause (c), may appeal to the Appellate Tribunal in the prescribed manner and on the prescribed fee: section 132(5).

A conflict question. One full-time member of the Authority is asked to join an audit firm's consultancy arm eighteen months after leaving office. The third proviso to section 132(3) forbids it: a full-time member may not be associated with any audit firm, including related consultancy firms, during his appointment and for two years after ceasing to hold it.

Distinctions that carry marks

What this does NOT mean

It does not mean the Authority notifies the accounting standards. It recommends; the Central Government notifies under section 133.

It does not mean the Institute is abolished. It continues, and the Authority applies its definition of misconduct under section 22 of the Chartered Accountants Act 1949. What the Institute cannot do is run a parallel inquiry once the Authority has started.

It does not mean debarment is confined to audit. It extends to internal audit and to valuation under section 247.

It does not mean every order can be appealed. Section 132(5) gives an appeal against orders under clause (c) of sub-section (4), that is the penalty and debarment orders.

Quick revision

• 132(1) and (1A): constituted by the Central Government by notification for accounting and auditing standards; functions performed through prescribed divisions.
• 132(2), four functions: recommend policies and standards to the Central Government; monitor and enforce compliance; oversee the quality of service of the professions and suggest improvements; and perform related prescribed functions.
• 132(3): a chairperson of eminence in accountancy, auditing, finance or law, and not more than fifteen other part-time and full-time members. Declaration of no conflict of interest; full-time members not associated with any audit firm or related consultancy firm during office and for two years after.
• 132(3A) and (3B): each division presided over by the Chairperson or an authorised full-time Member; an executive body of the Chairperson and full-time Members, for sub-section (2) other than clause (a) and for sub-section (4).
• 132(4)(a): investigate suo motu or on a Central Government reference into professional or other misconduct by a member or firm of chartered accountants. Proviso: no other institute or body may initiate or continue proceedings once the Authority has begun.
• 132(4)(b): powers of a civil court as to discovery and production, summoning and examining on oath, inspection, and commissions.
• 132(4)(c): penalty, individual one lakh to five times fees, firm five lakh to ten times fees; and debarment from audit, internal audit and section 247 valuation for six months to ten years. Explanation: misconduct as in section 22 of the Chartered Accountants Act 1949.
• 132(5): appeal to the Appellate Tribunal against orders under clause (c). Sub-sections (6) to (9) omitted.
• 132(10) onwards: procedure as prescribed, staff appointed by the Central Government, head office at New Delhi, accounts audited by the Comptroller and Auditor General and laid before each House of Parliament.

Test yourself

1. What are the functions of the National Financial Reporting Authority? To make recommendations to the Central Government on accounting and auditing policies and standards; to monitor and enforce compliance with those standards; to oversee the quality of service of the professions associated with ensuring compliance and suggest measures for improvement; and to perform such other related functions as may be prescribed: section 132(2).

2. Can the Institute of Chartered Accountants of India proceed against an auditor at the same time as the Authority? No. By the proviso to section 132(4)(a), no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the Authority has initiated an investigation.

3. What powers does the Authority have while investigating? The same powers as a civil court under the Code of Civil Procedure 1908 in respect of discovery and production of books and documents, summoning and enforcing attendance and examining persons on oath, inspection of books, registers and documents at any place, and issuing commissions for the examination of witnesses or documents: section 132(4)(b).

4. State the penalties for proved misconduct. For an individual, not less than one lakh rupees and up to five times the fees received; for a firm, not less than five lakh rupees and up to ten times the fees received: section 132(4)(c)(A).

5. What is the debarment power? To debar the member or firm from being appointed as an auditor or internal auditor, from undertaking any audit or internal audit of any company or body corporate, or from performing any valuation under section 247, for a minimum of six months and a maximum of ten years: section 132(4)(c)(B).

6. Where does an appeal lie? To the Appellate Tribunal, against an order under clause (c) of section 132(4), in such manner and on payment of such fee as may be prescribed: section 132(5).