Companies Act Section 132

Companies Act Section 132- Constitution of the National Financial Reporting Authority (NFRA)

Section 132 of the Companies Act, 2013 establishes the National Financial Reporting Authority (NFRA), which serves as an independent regulatory body overseeing accounting standards, auditing standards, and the quality of audit services provided to companies in India.

The primary objective of NFRA is to enhance transparency and public confidence in financial reporting by ensuring high standards of auditing and accounting practices. NFRA acts as a specialized authority to recommend policies, monitor compliance, and investigate misconduct by auditors.

Constitution of NFRA

The Central Government is empowered to constitute NFRA through an official notification. Once constituted, NFRA becomes the primary authority responsible for setting and enforcing accounting and auditing standards under the Companies Act, 2013.

Functioning through Divisions

NFRA will discharge its duties and functions through dedicated divisions, as may be prescribed by the Central Government. These divisions will handle different functional aspects to ensure efficient working and specialization in core areas.

Powers and Functions of NFRA

(A) Advisory Role - Recommendations to the Central Government

NFRA is responsible for advising and recommending policies to the Central Government concerning:

Accounting standards to be followed by companies and auditors.

Auditing standards applicable to audits of companies or a particular class of companies.

(B) Monitoring and Enforcement

NFRA has the authority to:

Monitor compliance with accounting and auditing standards.

Enforce adherence to such standards by companies and their auditors.

This is done in the manner prescribed by rules framed under the Act.

(C) Oversight and Quality Control of Audit Profession

NFRA will oversee the quality of service provided by audit professionals and audit firms, particularly those engaged in statutory audits of companies. Based on its findings, NFRA can:

Suggest measures for improvement in audit quality.

Recommend changes to enhance professional competence.

(D) Additional Functions

NFRA may also perform other functions related to its core roles, including those notified by the Central Government.

Composition of NFRA

NFRA will consist of:

A Chairperson who is a person of eminence possessing expertise in accountancy, auditing, finance, or law.

Other members (both full-time and part-time), not exceeding fifteen in total.

The Central Government will lay down the process, eligibility criteria, and terms and conditions for the appointment of the Chairperson and members.

Declaration of Independence

Each Chairperson and member must submit a declaration to the Central Government confirming:

There is no conflict of interest.

They are independent in relation to their appointment.

Restrictions on Association with Audit Firms

Full-time Chairpersons and members cannot be associated with any audit firm or related consultancy firm during their tenure in NFRA. This restriction extends for two years after leaving NFRA to prevent conflicts of interest.

Divisional Structure and Executive Body

Each functional division within NFRA will be headed by either the Chairperson or a full-time member authorized by the Chairperson.

An Executive Body will manage NFRA’s day-to-day functions, consisting only of the Chairperson and full-time members. This body will handle all functions except:

Making policy recommendations to the Central Government.

Performing certain quasi-judicial functions under Section 132(4).

Investigative Powers of NFRA

NFRA has extensive investigative powers, overriding any conflicting provisions in other laws. NFRA may:

Initiate investigations suo motu (on its own).

Conduct investigations based on a reference from the Central Government.

Investigations can cover:

Professional misconduct or other misconduct by individual chartered accountants or audit firms, registered under the Chartered Accountants Act, 1949.

Exclusive Jurisdiction

Once NFRA initiates an investigation, no other regulatory body (including ICAI) can start or continue parallel proceedings in relation to the same matter.

Civil Court Powers

While conducting investigations, NFRA has powers equivalent to those of a civil court, including:

Summoning witnesses and compelling their attendance.

Examining persons under oath.

Requiring the production of books of accounts and documents.

Inspecting documents and records at any place.

Issuing commissions for witness or document examination.

Disciplinary Powers and Penalties

If NFRA finds that professional or other misconduct is proved, it can:

(A) Impose Financial Penalties

On individuals: Minimum ?1 lakh, extendable up to five times the fees received.

On firms: Minimum ?5 lakh, extendable up to ten times the fees received.

(B) Impose Debarment

Debar the individual or firm from:

Being appointed as an auditor.

Performing internal audits.

Conducting valuations under Section 247.

This debarment can last for a minimum of six months, up to a maximum of ten years, depending on the severity of misconduct.

Definition of Misconduct

The term "professional or other misconduct" will have the same meaning as defined under Section 22 of the Chartered Accountants Act, 1949.

Right to Appeal

Any person aggrieved by NFRA’s disciplinary orders under this section can file an appeal before the appropriate Appellate Authority, as notified under the Act.

Operational and Administrative Provisions

Meetings and Procedures

NFRA will meet at such times and places and follow procedural rules as prescribed. This ensures structured and transparent functioning.

Staffing

The Central Government will appoint a Secretary and such other officers and employees as necessary for NFRA’s smooth functioning. The terms and conditions of service for these personnel will be prescribed by the Government.

Headquarters

The head office of NFRA will be located in New Delhi, though NFRA can hold meetings at other locations across India, if necessary.

Accounts and Audit

NFRA must maintain proper books of accounts in the prescribed format.

The accounts of NFRA will be audited by the Comptroller and Auditor-General of India (CAG) at specified intervals.

The audited accounts, along with CAG’s audit report, must be forwarded to the Central Government annually.

Annual Reporting

NFRA must prepare an Annual Report every financial year, detailing its activities and findings. This report must be:

Forwarded to the Central Government.

Laid before both Houses of Parliament, along with the CAG’s audit report.