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NATIONAL FINANCIAL REPORTING AUTHORITY RULES, 2018

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NATIONAL FINANCIAL REPORTING AUTHORITY RULES, 2018
By: Mr. M. GOVINDARAJAN
November 17, 2018
  • Contents

Introduction

The Central Government, in exercise of the powers conferred to it under section 132(2) and (4) made ‘The National Financial Reporting Authority Rules, 2018’, vide Notification dated 13.11.2018.  These rules came into force from the date of publication in the Official Gazette. 

Applicability of these Rules

Rule 3(1) provides that the National Financial Reporting Authority (‘Authority’ for short) shall have authority over the following companies-

  • Listed companies which listed their shares in the stock exchange in India or outside India;
  • Unlisted companies-
  • having paid up share capital not less than ₹ 500 crores; or
  • having annual turnover of not less than ₹ 1000 crores; or
  • having, in aggregate, outstanding loans, debentures and deposits not less than ₹ 500 crores

as on 31st March of immediately preceding financial year;

  • 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;
  • 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
  • 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 if the income or net worth of such subsidiary or associate company exceeds 20% of the consolidated income or consolidated net worth of such company or the body corporate.

Company to report the appointment of auditor

Every existing company to which these rules are applicable shall inform the Authority the particulars of the auditor in Form No. NFRA – 1 within 30 days from the date of commencement of these rules.   Every body corporate other than the company registered under Companies Act, 2013, registered in India within fifteen days of appointment of an auditor inform the Authority in Form NFRA-1 , the particulars of the auditor appointed by such body corporate.

A company or a body corporate other than a company governed under this rule shall continue to be governed by the Authority for a period of three years after it ceases to be listed or its paid-up capital or turnover or aggregate of loans, debentures and deposits falls below the limit stated therein.

Objects of the Authority

The Authority shall protect the public interest and the interests of investors, creditors and others associated with the companies or bodies corporate 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.

Functions of the Authority

The following are the functions of the Authority as prescribed by these Rules-

  • to maintain details of particulars of auditors appointed in the companies and bodies corporate;
  •  to recommend accounting standards and auditing standards for approval by the Central Government;
  • to monitor and enforce compliance with accounting standards and auditing standards;
  • to  oversee the quality of service of the professions associated with ensuring compliance with such standards and suggest measures for improvement in the quality of service;
  • to promote awareness in relation to the compliance of accounting standards and auditing standards;
  • co-operate with national and international organizations of independent audit regulators in establishing and overseeing adherence to accounting standards and auditing standards; and
  • to perform such other functions and duties as may be necessary or incidental to the aforesaid functions and duties.

For the effective performance of its functions under the Act, the Authority may constitute advisory committees, study groups and task forces.

Powers to Authority

The Central Government may, by notification, and subject to such conditions, limitations and restrictions as may be specified therein delegate any of its powers or functions under the Act, other than the power to make rules, to the Authority.

Annual return by Auditor

Every auditor shall file a return with the Authority on or before 30th April every year in such form as may be specified by the Central Government.

Accounting Standards and Auditing Standards

The Authority is to submit recommendations to the Central Government for its approval of the Accounting Standards and Auditing Standards.  For this purpose the Authority shall-

  • shall receive recommendations from the Institute of Chartered Accountants of India on proposals for new accounting standards or auditing standards or for amendments to existing accounting standards or auditing standards;
  • may seek additional information from the Institute of Chartered Accountants of India on the recommendations received, if required.

The Authority shall take suitable measures for the promotion of awareness and significance of accounting standards, auditing standards, auditors' responsibilities, audit quality and such other matters through education, training, seminars, workshops, conferences and publicity.

Authority to monitor and enforce the compliance of accounting standards

The Authority is to monitor and enforce the compliance of the accounting standards as approved by the Central Government, by the companies that are governed by these Rules.  The Authority may review the financial statements of any company, if required.  The Authority may seek any information or explanation from the company or auditor of the company in respect of the financial statements.  For this purpose the Authority is to issue notice to the concerned company or auditor with directions to give the information or explanation within a reasonable time as specified in the notice.

The Authority may require the personal presence of the officers of the company or body corporate and its auditor for seeking additional information or explanation in connection with the review of the financial statements of such company or body corporate.  The Authority shall publish its findings relating to non-compliances on its website and in such other manner as it considers fit, unless it has reasons not to do so in the public interest and it records the reasons in writing.   Where the Authority finds or has reason to believe that any accounting standard has or may have been violated, it may decide on the further course of investigation or enforcement action through its concerned Division.

Authority to monitor and enforce the compliance of auditing standards

The Authority is to monitor and enforce the compliance of auditing standards as approved by the Central Government, by the companies that are governed by these Rules.  The Authority, for this purpose, may-

  •  review working papers (including audit plan and other audit documents) and communications related to the audit;
  • evaluate the sufficiency of the quality control system of the auditor and the manner of documentation of the system by the auditor; and
  • perform such other testing of the audit, supervisory, and quality control procedures of the auditor as may be considered necessary or appropriate.

The Authority may require an auditor to to report on its governance practices and internal processes designed to promote audit quality, protect its reputation and reduce risks including risk of failure of the auditor.  The Authority may seek additional information or may require the personal presence of the auditor for seeking additional information or explanation in connection with the conduct of an audit.

 The Authority shall publish its findings relating to non-compliances on its website and in such other manner as it considers fit, unless it has reasons not to do so in the public interest and it records the reasons in writing.  It shall not publish proprietary or confidential information, unless it has reasons to do so in the public interest and it records the reasons in writing.

The Authority may send a separate report containing proprietary or confidential information to the Central Government for its information.   Where the Authority finds or has reason to believe that any law or professional or other standard has or may have been violated by an auditor, it may decide on the further course of investigation or enforcement action through its concerned Division.

Overseeing the quality

The Authority may, on the basis of its review, direct an auditor to take measures for improvement of audit quality including changes in their audit processes, quality control, and audit reports and specify a detailed plan with time-limits.  The Auditor is to improve the quality of his service as per the directions of the Authority and to send a report to the Authority explaining how he complied with the directions of the Authority.

The Authority may refer cases with regard to overseeing the quality of service of auditors of companies or bodies corporate referred to in rule 3 to the Quality Review Board constituted under the Chartered Accountants Act, 1949 or call for any report or information in respect of such auditors or companies or bodies corporate from such Board as it may deem appropriate.

Investigation

Where the Authority has-

  •  received any reference from the Central Government for investigation into any matter of professional or other misconduct under section 132(4);
  • decided to undertake investigation into any matter on the basis of its compliance or oversight activities; or
  •  decided to undertake suo motu investigation into any matter of professional or other misconduct, after recording reasons in writing for this purpose,

it shall forward the matter to its Division dealing with enforcement for carrying out investigation and other action.

 If, during the investigation, the Authority has evidence to believe that any company or body corporate has not complied with the requirements under the Act or rules which involves or may involve fraud amounting to rupees one crore or more, it shall report its findings to the Central Government.

Except the Authority no other body or institution shall take action against the auditors of the companies for professional or other misconducts. 

Disciplinary proceedings

If the Authority believes that sufficient cause exists to take actions permissible it shall refer the matter to the concerned division, which shall cause a show-cause notice to be issued to the auditor.  The show cause notice shall be in writing and shall contain-

  • the provisions of the Act or rules under which it has been issued;
  • the details of the alleged facts;
  •  the details of the evidence in support of the alleged facts;
  • the provisions of the Act, rules or the accounting standards or auditing standards thereunder allegedly violated, or the manner in which the public interest is allegedly affected
  •  the actions that the Authority proposes to take or the directions it proposes to issue if the allegations are established;
  • the time limit and the manner in which the auditor is required to respond to the show-cause notice;
  • the consequences of failure to respond to the show-cause notice; and
  • the procedure to be followed for disposal of the show-cause notice.

The show-cause notice shall enclose copies of documents relied upon and extracts of relevant portions from the report of investigation or other records.

The show cause notice shall be served on the auditor in the following manner,-

  •  by sending it to the auditor at the address provided by him or provided by the Institute of Chartered Accountants of India (if required by the Authority) by registered post with acknowledgement due; or
  • by an appropriate electronic means to the email address of the auditor provided by him or it or provided by the the Institute of Chartered Accountants of India (if required by the Authority).

If the auditor is a firm-

  •  a notice to a firm shall be deemed to be a notice to all the partners or employees of that firm as on the date of service of notice;
  • the notice shall call upon the firm to disclose the name or names of the partner or partners concerned who shall be responsible for answering the allegations;
  •  the partner whose name is disclosed by the firm shall be responsible for answering the notice against the firm, and if no partner, whether erstwhile or present, of the firm owns responsibility for the allegations made against the firm, .then the firm as a whole shall be responsible for answering the allegations, and all the partners and employees of that firm as on the date of occurrence of alleged misconduct, shall be responsible for answering the allegations.

The show-cause notice shall be disposed within a period of 90 days of the assignment through a summary procedure as may be specified by the Authority, by a reasoned order in adherence to the principles of natural justice including where necessary or appropriate an opportunity of being heard in person, and after considering the submissions, if any, made by the auditor, the relevant facts and circumstances, and the material on record.

The order disposing of a show-cause notice may provide for-

  •  no action;
  • caution;
  • action for imposing penalty against auditor under  or for debarring the auditor from engaging as such or both.

The said order will be effective after 30th day of the issuance unless there is a specific stipulation in the order on the effectiveness of the order.

A copy of the order shall be served on the auditor.  A copy of the said order may be forwarded to-

  • in all cases to –
  • the Central Government; and
  • the Institute of Chartered Accountants of India;
  • in the case of a company referred to in  section 139(5)  to the Comptroller and Auditor General of India;
  • in the case of a listed company to the Securities and Exchange Board of India;
  •  in the case of a bank or a non-banking finance company to the Reserve Bank of India;
  •  in the case of an insurance company to the Insurance Regulatory and Development Authority of India;
  •  in case the auditor is resident outside India to concerned regulator of such country;

and also published in the website of the Authority.

Appeal

The aggrieved auditor may file an appeal against the order.  The Auditor shall remit 10% of the penalty to the Authority for filing appeal.

Enforcement of order

If monetary penalty is imposed in the order, the Auditor shall pay the penalty within 30 days of the order.  If the auditor neither pays the penalty nor files appeal against the order, the Authority shall inform the companies where the auditor is appointed about the order and such companies are to appoint new auditor.

Where the orders debar the auditor from practice, the order shall be sent to every company or body corporate in which the auditor is functioning as auditor.  Such   order shall be sent to every company or body corporate in which the auditor is functioning as auditor and every such company or body corporate shall appoint a new auditor.

Punishment

 If a company or any officer of a company or an auditor or any other person contravenes any of the provisions of these rules, the company and every officer of the company who is in default or the auditor or such other person shall be punishable as per the provisions of section 450 of the Act.

Confidentiality of information

The Authority and all persons and organizations associated with it shall maintain complete confidentiality and security of the information provided to them for the purpose of the work of the Authority.  The Authority may enter into such contractual arrangements as may be necessary in order to maintain complete confidentiality and security of the information.

 Avoidance of conflict of interest

The Authority shall not enter into any contract, arrangement or relationship or participate in any event that may, or is likely to be perceived to, interfere with its ability to perform its functions and duties in an effective, fair and reasonable manner.   In particular the Authority or any person associated with it shall not receive any funds, assets, donations, favors, gifts or sponsorships from any source other than the Central Government and shall not enter into any liabilities, obligations or commitments except as permitted by the Central Government.

International associations and international assistance

The Authority may become a member of regional or international associations of independent audit regulators and standard-setters on such terms as it deems fit.  The Authority may provide assistance to, or receive assistance from, foreign independent audit regulators in investigation of an auditor in accordance with Indian laws on such terms as it deems fit.

 

By: Mr. M. GOVINDARAJAN - November 17, 2018

 

 

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