National Financial Reporting Authority: Is There Really a Need?

[Anirudh Singh is a 4thyear B.A LL.B (Hons.) student of NALSAR University, Hyderabad]

On 1 March 2018, the Union Cabinet gave its assent to National Financial Reporting Authority (NFRA), which is considered to be a major development for the regulation of financial auditing in big companies. As recommended by the Standing Committee on Finance in its 21streport, the NFRA will assume its role as an autonomous regulator wherein it will oversee the auditing profession. In accordance with the updated Companies Act, 2013, this autonomous body will replace ‘National Advisory Committee on Accounting Standards’ (NACAS) which was constituted by Central Government to advise it on the formulation and establishment of accounting standards and auditing policies under the regime governed by the Companies Act, 1956.

It can be observed that the restructuring of such regulating authorities in various nations has been carried out in response to accounting scams owing to the feeble regime of corporate governance and weak disclosure requirements in accounting and auditing. Consider the Sarbanes-Oxley Act in the US, which was formulated after 2002 Enron Scam. In India, the idea of floating the NFRA came about in the aftermath of the Satyam scam and its need was further highlighted after witnessing the more recent episodes involving Nirav Modi, Rotomac Global and Jatin Mehta.

The scope of the NFRA can be traced to Section 132 of Companies Act, 2013 wherein the body will consist of a chairperson, who shall be a person of eminence with expertise in auditing, accounting and finance or law to be appointed by the Central Government and such other members not exceeding 15, consisting of part-time, full-time members. The representatives of the Ministry of Corporate Affairs, the Comptroller and Auditor General of India, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) will be eligible for participation in the 15-membered body, where 3 members from the Institute of Chartered Accountants of India (ICAI) will also be included. A search-cum-selection committee, chaired by the Cabinet Secretary, would recommend names for appointments of chairperson and full-time members. Functions of the NFRA  include making recommendations  to  the Central Government on formulation,  laying down of accounting and auditing policies and standards for adoption by companies or their auditors, monitoring and enforcing compliance, overseeing quality of service of professionals and the like.

However, NFRA is attracting flak due to its curtailment of ICAI’s powers wherein the latter possessed the powers of investigating chartered accountants (CAs) under the Chartered Accountants (Amendment) Act, 2006. Undoubtedly, this professional body was criticized after the Satyam scam and, thereafter, a committee was constituted to suggest revamping provisions of the Companies Act. In Companies Act, 2013, a separate provision was included to notify the separate regulator to regulate CAs. The urgency of a regulatory body for CAs can be traced back to PM Narendra Modi’s speech on CA Day – 1 July 2017 – wherein he expressed his worries towards the accountants who participated as accomplices in tax evasion and money laundering.

A major argument against the NFRA is that for overseeing accounting and auditing norms for all listed and large unlisted companies, existing institutions such as the RBI or the ICAI were capable enough, provided that necessary reformulations of their structure and functioning were carried out. Creation of an additional layer will not only go against the spirit of “ease of doing business”, but could also result in another redundant agency. One can look back to the creation of Serious Frauds Investigation Office (SFIO), which was constituted after the Enron scam, and assert that it failed to curb the economic offences where institutions such as the Central Bureau of Investigations, SEBI, and the Excise and Customs Department were already present.

When laws seeking to address fraudulent situations are already available, there is no need of creating confusion by adding another layer of regulatory mechanism, which only leads to wastage of government resources. The government needs to strengthen the present regulatory system just the way it did by empowering SEBI to handle  the issues  related  to Forward Market Commission  (FMC), or by amending various laws to tackle economic offences.

Meanwhile, one will have to wait and see whether NFRA can live up to its expectations or not. It promises to eliminate the unethical practices by accounting firms that flout laws and allow misrepresentation of facts and figures in financial statements. An important aim for NFRA is to instill public confidence and establish strong deterrence against those who are engaged in fraudulent activities and bring transparency towards its stakeholders. Needless to say, strong political will is imperative for the desired functioning of the said body.

Anirudh Singh

About the author

Add comment

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Recent Posts

Topics

Recent Comments

Archives

web analytics