New Delhi: The Union cabinet on Thursday approved a proposal to establish a National Financial Reporting Authority (NFRA) as an independent regulator for the auditing profession, in an attempt to tighten the regulatory oversight over chartered accountants and plug loopholes.
Setting up NFRA was one of the key changes brought about by the Companies Act 2013 but its provisions were not notified for the last five years. However, the recent failure of auditors to spot the Rs12,636 crore PNB fraud, allegedly perpetrated by the group firms of Nirav Modi and Mehul Choksi, seems to have prompted the government to approve the proposal.
NFRA will have powers to investigate chartered accountants and their firms of all listed companies and large unlisted public companies, finance minister Arun Jaitley said in a press briefing after a cabinet meeting, adding the thresholds for unlisted companies will be prescribed in the rules that will be notified shortly. Further, NFRA will also investigate instances referred to it by the central government, Jaitley said.
The cabinet approved the creation of one post of chairperson, three posts of full-time members and one post of secretary for NFRA.
The government said the inherent regulatory role of the Institute of Chartered Accountants of India (ICAI) will continue “in respect of its members in general and specifically with respect to audits pertaining to private limited companies, and public unlisted companies below the threshold limit to be notified in the rules." Further, ICAI shall continue to play its advisory role with respect to accounting and auditing standards and policies by making its recommendations to NFRA, it said.
“We do not want to interfere in the professional autonomy of the institute or its functioning. The routine matters will stay there with the institute," said Jaitley.
The need for establishing NFRA has arisen in the wake of accounting scams, to establish independent regulators, independent from those it regulates, for enforcement of auditing standards and ensuring the quality of audits to strengthen the independence of audit firms, the government said.
“The decision is expected to result in improved foreign/domestic investments, enhancement of economic growth, supporting the globalisation of business by meeting international practices, and assist in further development of audit profession," the statement added.
In his first reaction to the PNB scam, Jaitley had questioned the role played by auditors for their failure to detect the scam that was going on since 2011.
“What were the auditors doing? Both internal and external auditors really have looked the other way or failed to detect," Jaitley had said adding that the profession of chartered accountants should start introspecting and take corrective steps.
NFRA will have the power to investigate not only chartered accountants who audited a firm but also firms of chartered accountants and can impose a penalty of up to five times the fee received in case of misconduct by individuals and ten times the fees received in case of firms. It can also debar an auditor for up to ten years.
While the NFRA can have up to 15 full-time or part-time members besides its chairman, the appellate body can have two members other than the chairman.
“India remains the only major economy where the audit profession is still considered self-regulated. NFRA will help build reinstate trust in the Indian audit profession, which has undoubtedly been tarnished by recent events," said Vishesh Chandiok, National Managing Partner, Grant Thornton India LLP.