NFRA: National Financial Reporting Authority

The National Financial Reporting Authority, usually written NFRA, is the audit regulator constituted under section 132 of the Companies Act, 2013. It writes recommendations on accounting and auditing standards, monitors compliance with them, investigates misconduct by chartered accountants and their firms, and can fine or debar them. For anyone reading a listed company's audit report, it is the body that sits behind the auditor.

What does the National Financial Reporting Authority do?

Sub-section (2) lists four functions, and it opens with an overriding clause: Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall do the following.

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

Clause (a) is advisory: NFRA recommends, the Central Government lays down. Clauses (b) and (c) are where the enforcement lives.

Who sits on NFRA, and what independence rules apply?

Sub-section (3) provides for a chairperson who shall be a person of eminence and having expertise in accountancy, auditing, finance or law to be 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 follow, and two of them are independence rules rather than procedure. The chairperson and members must 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. Separately, those in full time employment with NFRA shall not be associated with any audit firm (including related consultancy firms) during the course of their appointment and two years after ceasing to hold such appointment.

What powers does NFRA have over auditors?

Sub-section (4) is also introduced by an overriding clause, and it gives three kinds of power.

Investigation. NFRA may investigate, either suo motu or on a reference made to it by the Central Government, and the clause scopes that power for such class of bodies corporate or persons, in such manners may be prescribed, printed with that slip for manner as in the India Code consolidation. What it investigates is matters of professional or other misconduct committed by any member or firm of chartered accountants registered under the Chartered Accountants Act, 1949. A proviso makes the jurisdiction exclusive once it starts: 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.

Civil court powers. For four listed matters, NFRA has the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, covering discovery and production of books, summoning and examining persons on oath, inspection of books, registers and other documents, and issuing commissions for examination of witnesses or documents.

Orders on proof of misconduct. Where misconduct is proved, NFRA may impose the penalties in the table below, and may debar the member or firm.

The debarment limb reaches two activities. It covers being appointed as an auditor or internal auditor or undertaking any audit in respect t of financial statements or internal audit of the functions and activities of any company or body corporate, printed with that typographical slip in the India Code consolidation, and separately performing any valuation as provided under section 247. The period is a minimum period of six months or such higher period not exceeding ten years as NFRA determines. The valuation role it can shut off is described in what is a registered valuer, and the internal audit role in internal audit under section 138.

How does NFRA relate to the auditor rules elsewhere in the Act?

It enforces the standards that the rest of Chapter X assumes. The appointment, rotation and removal rules put an auditor in place and take one out; NFRA is the body that acts on how the work was done.

An aggrieved person's route out is section 132(5): an appeal against an order under clause (c) of sub-section (4) lies before the Appellate Tribunal in such manner and on payment of such fee as may be prescribed, words substituted by Act 1 of 2018 with effect from 9 February 2018 for the earlier reference to an Appellate Authority constituted under sub-section (6). Sub-sections (6) to (9) were omitted by the same amendment, which is why the section runs from (5) to (10).

• Auditor rotation section 139 covers the tenure rules.
• Auditor removal section 140 covers how an auditor is taken out before term.
• Auditor fraud reporting section 143 covers the duty to report fraud.
• How to track auditor resignations is where a change of auditor becomes visible in exchange filings.

The National Financial Reporting Authority publishes its own orders, and an NFRA order naming a listed company's auditor is a public document. It is not a filing by the company, so it will not appear in an exchange feed unless the company discloses it as a material event.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.