It took almost a year but India’s premier audit and accountancy regulatory body — the National Financial Reporting Authority (NFRA) — has finally found its own address.
After camping in make-shift offices, it shifted to a upmarket central Delhi building just a few months ago that was previously the office of the Competition Commission of India.
The biggest reprieve for NFRA has not been getting a roof above its head but the dismissal of a writ petition filed against it by the Northern India Chartered Accountants’ Federation in the Calcutta High Court.
With questions being raised about the legality of NFRA taking over the job from the Institute of Chartered Accountants of India (ICAI) to investigate accounting professionals of listed companies, it had become a major hurdle for the body to carry out with its functions.
“It is finally free of fetters… All the questioning over legality of NFRA is settled now and it can go about its business and get to work,” a senior official added.
And work, there is plenty. In the last six months, NFRA has taken upon itself at least six investigations – two of them include the high profile collapse of
Infrastructure Leasing and Financial Services (IL&FS) and the latest case of Infosys.
“NFRA has asked Infosys to share detailed information and the company has sought time to respond,” a person close to the matter said.
With retired bureaucrat Rangachari Sridharan at its helm, NFRA is finally getting to work and stepping up hiring, investigations and monitoring auditing standards.
However, it is still early days as the organisation is trying to fill 62 posts sanctioned by the government; most of them are lying vacant with the search for right talent going on in full swing. “It is also aggressively recruiting experts on a need basis,” a senior government official said.
NFRA has two executive directors, one full-time member and a secretary as of now. It has also got on board a consultant. Posts have also been reserved for representation from the Institute of Chartered Accountants of India and more candidates are being interviewed to find the right talent.
The authority has taken up the terms and conditions for employment from the Securities and Exchange Board of India’s (Sebi’s) handbook. Investigations aside, NFRA has also started the registration process for audit companies and also asked them to flag concerns with the books of any of the auditees.
While NFRA has begun the process of inspection to ascertain how audit firms are complying with the auditing standards, the finer details of conducting this exercise are being worked out.
The Company Law Committee recommended the creation of NFRA in 2016 but continued debate and opposition to the idea delayed the process.
It was the Rs 12,700 crore Punjab National Bank fraud that nudged the government into action. With the disciplinary role of the ICAI under question and the trend of a global shift from the self-regulatory model, the government wanted to create an independent oversight mechanism in the auditing profession.
As a result, the Cabinet notified the NFRA on March 21, 2018.
The financial reporting authority, under Section 132 of the Companies Act, 2013, is empowered to oversee the quality of audit service and undertake investigation of companies whose securities are listed on any stock exchange in India or abroad. Also, it can probe unlisted public companies having paid-up capital of no less than Rs 500 crore or annual turnover of no less than Rs 1,000 crore. NFRA has also been given powers to investigate professional misconduct committed by members of the ICAI for prescribed class of body corporate or persons.
It can issue an order imposing monetary penalty as well as debar an individual member or firm registered with the ICAI for six months to 10 years, for professional or any other misconduct. ICAI would continue to regulate the auditors of public companies below a certain threshold as well as private companies.
“It (NFRA) has a very comprehensive scope. There is a need for restoring the confidence in audit and the quality of the audit standard. It goes beyond punitive action. We have to give some more time to NFRA to see if it is up for the challenge,” said Ashok Haldia, former secretary of the ICAI.
Setting up of an independent oversight body like NFRA has also moved India closer to global best practices in the audit industry. India can now get a seat on the International Forum of Independent Audit Regulators, sharing a platform with audit regulators from 55 jurisdictions. “We can exchange best practices which will enhance investor confidence and protection while improving our audit quality at a global standard,” a senior executive of an audit firm said.
While conceptually, NFRA has a big purpose to serve, implementation and approach of the body will be major drivers for its success.
The audit fraternity feels that while investigation is an important part of NFRA’s mandate, the body needs to have greater engagement with the profession of auditing and accounting. “It should not act like a policeman. The role is also to nurture and understand the profession. Companies do not fail because of a bad audit,” an auditor with a leading firm said. A committee of experts, formed under the ministry of corporate affairs to look into the regulating of audit firms, had also recommended ways to further strengthen the NFRA.
This could be done by providing it powers to publish audit inspection results, subject to necessary checks and balances.
“This will provide an effective tool of deterrence for better compliance by the auditors of public companies with the applicable laws and professional standards,” said the committee, in its report.