Auditing Current Affairs - 2020

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National Financial Reporting Authority submits first report since constitution

The National Financial Reporting Authority (NFRA) issued its first audit report of IL&FS Financial Services Limited for the year 2017-18. It is the first report submitted by the authority since its constitution in October 2018. The audit was conducted abiding Section 13(2) of the companies act, 2013 and NFRA rules, 2018.

Highlights

Prior to NHRA, the audit of the IL and FS financial services were conducted by Deloitte Haskins and Sells (DHS). NHRA reports that the audit conducted by DHS was inadequate.

IL and FS crisis

IL and FS is a non-banking financial company that was established 30 years ago in order to conglomerate funds for infrastructure projects in India. The company fell short of cash recently and faced cash over runs, delays in land acquisition and approvals in 2018.

National Financial Reporting Authority

National Financial Reporting Authority was established in 2018 under the Companies act, 2013. Due to the establishment of NFRA, India is now eligible for membership of International Forum of Independent Audit Regulators. It is a global member organization that includes regulators from 53 jurisdictions. It was established in 2006 at Paris. It works to enhance investor protection by improving auditing globally.

Companies act, 2013

The powers and function of NFRA is listed under Section 13(2) of companies Act, 2013.

Under Section 13 (2) of the Companies act, 2013, the NFRA is responsible to audit policies and standards in the country, impose sanctions against defaulting auditors, audit firms and their monetary penalties. It is also responsible to audit companies that are listed in stock exchanges and those that function outside India.

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Cabinet approves establishment of National Financial Reporting Authority

The Union Cabinet approved establishment of National Financial Reporting Authority (NFRA) as an independent regulator for the auditing profession. It aims to tighten regulatory oversight over auditors and plug loopholes. It will be independent from those it regulates for enforcement of auditing standards and ensuring quality of audits.

National Financial Reporting Authority (NFRA)

NFRA will independent regulator under Companies Act, 2013. Its mandate is for establishment and enforcement of accounting and auditing standards and oversight of work of auditors. It will ensure quality of audits to strengthen independence of audit firms and therefore, enhance investor and public confidence in financial disclosures of companies.

Composition: NFRA will be 15 members body, consisting of Chairperson, three full-time Members and one Secretary.

Functions: It will overarching watchdog for auditing profession. It can debar an erring auditor or auditing firm for up to 10 years besides it can also slap heavy penalties. Even powers of Institute of Chartered Accountants of India (ICAI) to act against erring chartered accountants will be vested with NFRA.

Jurisdiction: It extends investigation of Chartered Accountants and their firms to all listed companies as well as large unlisted public companies. Government will prescribe thresholds in the rules. Government can also refer other entities for investigation where public interest is involved. However, inherent regulatory role of existing ICAI will continue in respect of its members and specifically to audits pertaining to private limited companies and public unlisted companies below threshold limit notified in rules. Further, ICAI will continue to play its advisory role with respect to accounting and auditing standards and policies by making its recommendations to NFRA.

Impact: Establishment of NFRA will improve foreign/domestic investments, enhance of economic growth, support globalisation of business by meeting international practices and assist in further development of audit profession.

NFRA and Quality Review Board (QRB): QRB will continue its quality audit in respect of private limited companies, public unlisted companies below prescribed threshold and also with respect to audit of companies delegated by NFRA.

Background

The need for establishing NFRA was in wake of accounting scams and to establish independent regulator independent from those it regulates for enforcement of auditing standards. Its establishment is in line with key changes brought in by the Companies Act, 2013 which was on specific recommendations of Standing Committee on Finance (in its 21st report).

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