NATIONAL FINANCIAL REPORTING AUTHORITY RULES [NFRA]

Ques on ICAI - -Where is the profession headed in India? Has the institute been just a tool at
the hands of small accounting firms? Has it discharged its obligations in taking disciplinary
actions? Has it been forward looking on the global developments? Has it participated
adequately on the broader theme of corporate governance and how it can contribute to the
debate?"

The National Financial Reporting Authority Rules, 2018 (NFRA Rules) were published in the
official gazette on 14th November, 2018.

Section 132 read with NFRA Rules

As per Rule 3 (1), the NFRA shall have the power to monitor and enforce compliance
with accounting standards and auditing standards, oversee the quality of service or
investigate the auditors of the following classes of companies:

Rule 3(1) -

a. companies whose securities are listed on any stock exchange in India or

outside India;

b. unlisted public companies having paid-up capital of not less than rupees five

hundred crores or having annual turnover of not less than rupees one

thousand crores or having, in aggregate, outstanding loans, debentures and

deposits of not less than rupees five hundred crores as on the 31st March of

immediately preceding financial year;

c. insurance companies, banking companies, companies engaged in the

generation or supply of electricity, companies governed by any special Act for

the time being in force or bodies corporate incorporated by an Act in

accordance with clauses (b), (c), (d), (e) and (f) of sub-section (4) of section 1

of the Act;

d. any body corporate or company or person, or any class of bodies corporate

or companies or persons, on a reference made to the Authority by the Central

Government in public interest; and

 e. a body corporate incorporated or registered outside India, which is a

subsidiary or associate company of any company or body corporate

incorporated or registered in India as referred to in clauses (a) to (d), if the

income or net worth of such subsidiary or associate company exceeds twenty

per cent of the consolidated income or consolidated net worth of such

company or the body corporate, as the case may be, referred to in clauses (a)

to (d).

 Interestingly, the ICAI will continue to regulate auditors of private companies and
unlisted public companies below the threshold limits under Rule 3 (1)(b).

 Similarly, the Quality Review Board (QRB) will continue to oversee the quality of
services of auditors of such private companies and unlisted public companies.

 However, such private companies and unlisted public companies are still required
to inform the NFRA of the particulars of their auditors, as per Rules 3 (2) and 3
(3).

 This will enable the NFRA to notify companies when their auditors are penalised
or debarred in disciplinary proceedings by the NFRA. Additionally, the NFRA is
empowered to refer cases to the QRB relating to the quality of services of auditors
of companies which are specified under Rule 3 (1).

On 1st July, 2019, the MCA issued a notification requiring all body corporates not governed
by the NFRA Rules to fill Form NFRA-1 regarding the particulars of the auditor appointed by
such body corporates. The last date for such a filing is 31st July, 2019.

A crucial distinction is found in the major function of the NFRA, which is to protect the
public interest and the interests of investors, creditors and others associated with the
companies or bodies corporate governed under Rule 3 (1) by establishing high quality
standards of accounting and auditing and exercising effective oversight of accounting
functions performed by the companies and bodies corporate and auditing functions
performed by auditors.

While Rule 6 of the NFRA Rules provides that ICAI shall give recommendations to the
NFRA in relation to accounting and auditing standards, it appears that the NFRA is
expected to relieve ICAI of its powers of regulating and establishing standards for accounting
and auditing in India.

If the auditing profession is expected to return to the position of integrity on which it was built,
the NFRA and the ICAI must work together towards regulating the profession and establishing
high standards in line with global expectations.