Why is it in the News?

The National Financial Reporting Authority (NFRA) is going to inspect the Big Four audit firms as well as other top auditors of large listed entities in 2024, an official familiar with the development told FE.

What is the National Financial Reporting Authority (NFRA)?

• The National Financial Reporting Authority (NFRA) is a statutory body and was constituted on 1st October 2018 by the Government of India under Sub Section (1) of section 132 of the Companies Act, 2013.
• It is responsible for setting accounting standards in the country.
  • The Punjab National Bank fraud prompted the government to establish an NFRA as the legal regulator for the auditing profession.
• Its mandate is to improve the quality and consistency of financial statements in the country and ensure that businesses and financial institutions disclose accurate and fair information.
• The National Financial Reporting Authority (NFRA) is located in New Delhi.
• The chairperson since March 2022 is Ajay Bhushan Pandey.
• The NFRA can probe listed as well as unlisted public companies.
  • Companies must have a paid-up capital of ?500 crores and an annual turnover of ?1,000 crores.

Functions and Duties:

• As per Sub Section (2) of Section 132 of the Companies Act, 2013, the duties of the NFRA are to:
• 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;
• Perform such other functions and duties as may be necessary or incidental to the aforesaid functions and duties.

Composition of the NFRA:

• As mandated by the Companies Act, NFRA is comprised of a chairperson appointed by the Central Government and a maximum of 15 members.
• The individuals selected for these roles must possess expertise in accountancy, auditing, finance, or law.
• Furthermore, they are required to declare to the Central Government that there is no conflict of interest or lack of independence in their appointment.

Membership Qualifications:

• All members, including the chairperson, who are in full-time employment, are prohibited from association with any audit firm (including related consultancy firms) during their term of office and for a period of two years after the completion of their term.

Powers of the NFRA:

• The NFRA has the same powers as the Civil Court.
• The NFRA has the authority to investigate matters of misconduct involving CAs and Chartered Accountants.
• It can impose a penalty of not less than ?1 lakh but not exceeding 5 times the fees collected.
• Also, the NFRA may also investigate and take action against individuals who violate the rules of professional conduct.
• It has the power to initiate investigations on its own and upon referral from the Central Government.