In a significant move, the Cabinet today approved setting up of the independent regulator National Financial Reporting Authority (NFRA) that will have sweeping powers to act against erring auditors and auditing firms.
The decision to constitute NFRA, as envisaged in the Companies Act, 2013, comes at a time when auditors have come under the scanner for alleged lapses in various corporate scams, including the biggest banking sector fraud to the tune of Rs 12,700 crore at Punjab National Bank.
It would be an overarching watchdog for auditing profession and once set up, the current powers of the ICAI to act against erring chartered accountants will be vested with the new regulator.
"The NFRA will act as an independent regulator for the auditing profession which was one of the key changes brought in by the Companies Act, 2013," Corporate Affairs Minister Arun Jaitley said here after the Cabinet meeting.
While many provisions of the Act came into force from April 1, 2014, the setting up of the NFRA has been delayed.
The jurisdiction of the NFRA -- which would be an oversight body for auditors -- will extend to all listed companies as well as large unlisted public companies. The thresholds would be prescribed in the rules.
Besides, the government can refer other entities for investigation by the NFRA where public interest would be involved.
The NFRA will have powers to debar an erring auditor or auditing firm for up to ten years besides slapping heavy penalties.
The regulator will have 15 members, including a chairperson and three full-time members. Besides, there would be a secretary.
Jaitley said NFRA would help in improving foreign and domestic investments as well as support globalisation of business by meeting international practices.
Corporate Affairs Secretary Injeti Srinivas said the notification regarding the NFRA is likely to be issued in a fortnight.
"It (NFRA) has wide powers. Any company, (if) it has reasons to believe that financial statements do not reflect the true and clear view, it (NFRA) can investigate," Srinivas said.
In case violations are found, the regulator can take penal action, he added.
When the NFRA is constituted, Srinivas said it can have some sort of random sampling method with regard to financial statements of companies.
As per Section 132 of the Companies Act, 2013, NFRA will have powers to impose less than Rs 1 lakh fine and the amount can extend up to five times of the fees received in case of individuals.
For firms, the minimum penalty would be Rs 10 lakh and could go up to ten times of the fees received, according to the Act.
The Institute of Chartered Accountants of India (ICAI) has not been in favour of setting up of the NFRA.
Vishesh Chandiok, National Managing Partner at Grant Thornton India LLP said NFRA will help build reinstate trust in the Indian audit profession, which has undoubtedly been tarnished with recent events.
