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NFRA: watchdog or bloodhound?

The National Financial Reporting Authority (NFRA) may just end up being another tool for fraud cover-up and big corporate scams may never see the light due to political involvement, says Shivanand Pandit

Mega frauds in recent years have questioned the independence of auditors. With many billionaire business barons indulging in loot and scoot, doubts are raised on the integrity of the profession of accounting and audit. Many times charted accountants are made the scapegoats as if auditors are the only folks sleeping at the wheel even though there is a quasi-independent regulator, viz. the Quality Review Board (QRB).

Numerous economic offenders and delinquents have accelerated the rankings of ‘Ease of Doing Frauds’ in India. Majority of the scams such as Satyam, Punjab National Bank scandal, Videocon episode etc., lived happily in undetected zone for years together. Many commentators quickly concluded that inability to detect such frauds is an audit failure. This unwelcoming situation led to a huge public outcry and appeals for a comprehensive refurbishment of the regulation of the accounting and auditing profession in India.

On March 1, 2018, the union cabinet approved the creation of a National Financial Reporting Authority (NFRA), five years after it was legislated. The NFRA was first proposed as an independent regulator of accounting and auditing in the wake of the Satyam scandal.

The report of the standing committee on finance of the Lok Sabha in 2010, recommended the creation of a supervisory mechanism with a mandate to not only set and oversee accounting and auditing standards but also to monitor the quality of audit undertaken across the corporate sector.  As a result, the Companies Act 2013 included section 132 relating to the NFRA. Most provisions of the Companies Act 2013 had been notified by 2017 but section 132 was not.

The Institute of Chartered Accountants of India (ICAI) opposed the creation of the NFRA from the beginning. There were times when the demand for constitution of the NFRA became louder but with the efforts of the council and the cooperation of certain political leaders who saw merits in the ICAI arguments, its formation did not take place.

In 2016, the standing committee on finance of the Lok Sabha on the Companies (Amendment) Bill 2016 recommended that the excising mechanism under the ICAI Act “should be strengthened and streamlined without needlessly adding to regulatory levels.” However, the committee’s recommendation came in the face of the strong case made for the NFRA by the Company Law Committee and the ministry of corporate affairs (MCA), and the earlier standing Committee. The MCA stood its ground on the need for the NFRA, though it was not set up.

However the Prime Minister on July 1, 2017 altered the panorama and hinted at CAs’ involvement in money-laundering and tax evasion and underscored the ICAI’s poor record of disciplining its members. Post the Rs.13,000 crore Punjab National Bank scam the government felt that setting up of the NFRA could not be deferred further.

Most of the major economies of the world have autonomous audit regulators, and over the last decade or so, umbrella bodies have come up that have provided an element of solidity to these regulators. The International Forum of Independent Audit Regulators (IFIAR) was set up in 2006, and now it has more than 50 independent audit regulators worldwide as members.

The question here is, would NFRA recover the money if was set up earlier? If not, why not reinforce or restructure the existing system rather than crafting another layer of red tape through NFRA. This will definitely spoil the essence of ease of doing business. There are millions of businesspersons and all of them are not dishonest and deceitful.

Before NFRA many institutions were formed. For instance, the Serious Fraud Investigation Office (SFIO) due to the Enron scam. Since March 2007, SFIO has inquired less than 100 cases and submitted less than 20 reports. The output will be zero if NFRA is an attempt to copy the Public Company Accounting Oversight Board (PCAOB), which is not a big success anyway. Formation of NFRA and sharing regulatory powers with ICAI will just create a mess and open another window to conceal frauds. For now ICAI deals with professional misconduct of its member CAs. But under NFRA, parameters would be mended from case to case and maybe it just ends up being another governmental tool for fraud cover-up and big scams may never see the light due to political and ministry involvement. It will be like authorizing the fox to guard the hen-house.

Therefore, the government should not resort to a mindless reaction because of one case. The ICAI and the NFRA need to join forces towards a common intention of augmenting audit quality. This will, in turn, lead to better financial reporting. The expectations from the auditing profession are higher than any-time before. Auditors vouch for the integrity of a company’s numbers and are critical to the functioning of the market and the economy. The NFRA should aim at boosting the reputation of the audit profession and the value from an audit. It should focus its efforts not on standard setting (where it should rely entirely on the ICAI as standards are now which are aligned to global standards) but on overseeing larger audit firms that audit public interest entities. It should bring to the table a sense of eliminating bad auditors and shift among the people that profession is not grossly bad as perceived.

Disciplinary cases in respect of listed entities and unlisted entities above a threshold limit would be dealt with by the NFRA and all other cases must be dealt with by the ICAI. For the NFRA to be effective, the threshold limit has to be pragmatic and sensible.

The technical committee and the enforcement committee of the NFRA should have experts in accounting, auditing and the disciplinary mechanism. It should also look at company secretaries who are currently governed by the Institute of Company Secretaries of India (ICSI) as they have an equally important role to play in examining rule compliance. In the long term, if NFRA can work like an institution such as SEBI, the long term effects are going to be extremely good. It should also help in globalization of businesses thereby generate more demand and scope for CAs.

Hope the NFRA will perform judiciously and make India’s plan of having an ‘Independent’ Audit Regulator utilitarian. Effective external monitoring is expected to improve the audit quality due to better compliance with auditing standards. But, if NFRA ends up like the rest of regulators in India, then not much is going to change.

*The writer is a Margao based financial advisor and tax specialist


Salient functions of NFRA

  • To make recommendations to the central government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or class of companies or their auditors;
  • To monitor and enforce the compliance with accounting standards and auditing standards;
  • To oversee quality of service of the professions associated with ensuring compliance with such standards and suggest measures as required.
  • Perform such other functions relating to above mentioned functions as may be prescribed.
  • The NFRA has been empowered to investigate, either suo motu or on a reference to it by the central government into the matters of professional and other misconduct committed by any member of ICAI.
  • NFRA is also empowered to impose specified penalty including debarring the professional from the practice for a minimum period of six months or for such higher period not exceeding ten years as may be decided by the NFRA.
  • Further, if NFRA initiates proceedings, no other institute or body can initiate or continue proceedings in the same matter.

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