NATIONAL FINANCIAL REPORTING AUTHORITY (NFRA)

Through Section 132 of the Companies Act, 2013, the Central Government has introduced a
new regulatory authority named as National Authority for Financial Reporting known as
National Financial Reporting Authority (NFRA) with wide powers to recommend, enforce
and monitor the compliance of accounting and auditing standards. The Companies Act, 1956
empowers the Central Government to form a Committee for recommendations on Accounting
Standards which is National Advisory Committee on Accounting Standards (NACAS). This
is now being renamed with enhanced independent oversight powers and authority as National
Financial Reporting Authority (NFRA).

NFRA shall be responsible for monitoring and enforcing compliance of auditing and
accounting standards and for that purpose, oversee the quality of professions associated with
ensuring such compliances. The Authority shall investigate professional and other
misconducts which may be committed by Chartered Accountancy members and firms. There
is also a provision for appellate authority.
The National Financial Reporting Authority shall be a quasi – judicial body to regulate
matters related to accounting and auditing. With increasing demand of non – financial
reporting, it may be referred to as a National level business Reporting Authority to regulate
standards of all kind of reporting- financial as well as non – financial, by the companies in
future.
National Financial Reporting Authority shall give its recommendations on accounting
standards and auditing standards. It shall only recommend and it is the Central Government
who shall prescribe such standards.
Objective
The objectives of National Financial Reporting Authority inter alia shall be as follows:
(1) Make recommendations on formulation of accounting and auditing policies and standards
for adoption by companies, class of companies or their auditors;
(2) Monitor and enforce the compliance with accounting standards, monitor and enforce the
compliance with auditing standards;
(3) Oversee the quality of service of professionals associated with ensuring compliance with
such standards and suggest measures required for improvement in quality of service, and
(4) Perform such other functions as may be prescribed in relation to aforementioned
objectives.
These objectives simply bring chartered accountants, cost accountants, management
accountants, company secretaries as well as independent directors / members audit
committees under jurisdiction of NFRA.
Constitution of NFRA
The constitution of National Financial Reporting Authority, which is supposed to be
constituted as an oversight regulatory body to recommend accounting and auditing standards,
shall be governed by sub - section (3) and (4) of section 132. Accordingly,
(i) It shall consist of a chairperson, who shall be a person of eminence & having expertise in
accountancy, auditing, finance, business administration, business law, economics or similar
disciplines, to be nominated by Central Government, and such other prescribed members not
exceeding 15.
(ii) The chairperson and all members shall make a declaration in prescribed form about no
conflict of interest or lack of independence in respect of their appointment. The chairperson
and all full – time members shall not be associated with any audit firm or related consultancy
firm during course of their appointment and two years after ceasing to hold such
appointment.
(iii) The head office of National Financial Reporting Authority shall be at New Delhi and it
may, meet at such other places in India, as it deems fit.
(iv) Its accounts shall be audited by Comptroller and Auditor General of India (CAG) and
such accounts as certified by CAG, together with audit report, shall be forwarded annually to
the Central Government.
For the constitution of National Financial Reporting Authority, the Act doesn’t prescribe for
nomination of members from MCA, ICSI, ICAI, ICMAI, as opposed to what was prescribed
under the Companies Act, 1956 in respect of constitution of National Advisory Committee on
Accounting Standards. The same shall be prescribed by Central Government so far as terms,
conditions and manner of appointment is concerned.
Members appointed could be full time members or part time members.

Jurisdiction, Powers of and Imposition of Penalties by NFRA

The National Financial Reporting Authority shall have jurisdiction over bodies corporate and
persons for matters of professional and other misconduct committed, by any member or firm
of Chartered Accountants registered under the Chartered Accountants Act, 1949. No other
institute or body (including professional institutes) shall initiate or continue any proceeding in
such matters of misconduct where the authority has initiated an investigation under this
section.
The Authority shall have powers as are vested in a civil court under Code of Civil Procedure
in respect of following matters:
1. Discovery and production of books of accounts and other documents
2. Summoning and enforcing the attendance of persons and examining them on oath
3. Inspection of any books, registers and other documents of any person
4. Issuing commission for examination of witness or documents.
Sub-section (4) is a non-obstante clause, providing a bar on anybody or any institute, in
initiating or continuing the proceedings in matters relating to misconduct as referred to in
Chartered Accountants Act 1949.
The Authority shall have powers to make an order in relation to:
A. Imposing penalty of
(i) not less than one lakh rupees which may extend to five times of the fees received in case
of individuals and
(ii) not less than ten lakh rupees which may extend to ten times of the fees received in case of
firms
B. Debarring member or the firm from engaging himself or itself from practice for a period of
six months to ten years.

Appointment of auditors [Section 139]

Section 139 of the Companies Act, 2013 provides for appointment of auditors. This provision
came into force from 1st April, 2014. This Section provides:

Appointment of auditor [Section 139 (1)]

(a) Every company shall, at the first annual general meeting, appoint an individual or a firm
as an auditor of the company.
(b) The auditor shall hold office from the conclusion of 1st annual general meeting (AGM)
till the conclusion of its 6th AGM and thereafter till the conclusion of every sixth meeting and
the manner and procedure of selection of auditors by the members of the company at AGM
has been prescribed under the Companies (Audit and Auditors) Rules, 2014. According to the
Rules:
(c) Manner and Procedure of selection and appointment of auditors [Rule 3 of Companies
(Audit and Auditors) Rules, 2014]:
(1) In case of a company that is required to constitute an Audit Committee under Section 177,
the committee and in case where such a committee is not required to be constituted, the
Board shall take into consideration the qualifications and experience of the individual or the
firm proposed to be considered for appointment as auditor and whether such qualifications
and experience are commensurate with the size and requirements of the company.
(2) Audit Committee or the board, as the case may be, shall have regard to any order or
pending proceeding relating to professional matters of conduct against the proposed auditor
before the Institute of Chartered Accountants of India or any competent authority or any
Court.
(3) It may call for such other information from the proposed auditor as it may deem fit.
(4) If the Board agrees with the recommendation of the Audit Committee, it shall further
recommend the appointment of an individual or a firm as auditor to the members in the
AGM.
(5) If the Board disagrees with the recommendation of the Audit Committee, it shall refer
back the recommendation to the committee for reconsideration citing reasons for such
disagreement.
(6) If the Audit Committee, after considering the reasons given by the Board, decides not to
reconsider its original recommendation, the Board shall record reasons for its disagreement
with the committee and send its own recommendation for consideration of the members in
the annual general meeting; and if the Board agrees with the recommendations of the Audit
Committee, it shall place the matter for consideration by members in the AGM.
(d) Before the appointment is made, the written consent of the auditor to such appointment,
and a certificate from him or it that the appointment, if made, shall be in accordance with the
conditions as may be prescribed, shall be obtained from the auditor.
(e) Certificate by Auditor: The Companies (Audit and Auditors) Rules, 2014 provides the
content of the Certificate. According to this, the auditor appointed shall submit a certificate
that:
(1) the individual or the firm, as the case may be, is eligible for appointment and is not
disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the
rules or regulations made there under.
(2) the proposed appointment is as per the term provided under the Act.
(3) the proposed appointment is within the limits laid down by or under the authority of the
Act.
(4) the list of proceedings against the auditor or audit firm or any partner of the audit firm
pending with respect to professional matters of conduct, as disclosed in the certificate, is true
and correct.
(f) The certificate shall also indicate whether the auditor satisfies the criteria provided in
Section 141.
(g) Further, the company shall inform the auditor concerned of his or its appointment, and
also file a notice (in the Form ADT-1) of such appointment with the Registrar within 15 days
of the meeting in which the auditor is appointed.
Note : It may kindly be noted that appointment includes reappointment also.

Term of Auditor [Section 139 (2)]

(a) Section 139 (2) provides that listed companies and other prescribed class or classes of
companies (except one person companies and small companies) shall not appoint or re-
appoint:
(1) an individual as auditor for more than one term of five consecutive years, and
(2) an audit firm as auditor for more than two terms of five consecutive years.
(b) Rule 5 of the Companies (Audit and Auditors) Rules, 2014 has prescribed the following
classes of companies for the purposes of Section 139 (2):
(1) all unlisted public companies having paid up share capital of ` 10 crore or more.
(2) all private limited companies having paid up share capital of ` 20 crore or more.
(3) all companies having paid up share capital of below threshold limit mentioned in (1) and
(2) above, but having public borrowings from financial institutions, banks or public deposits
of ` 50 crores or more.
(c) Cooling off Period:
(1) An individual auditor who has completed his term (i.e., one term of five consecutive
years) shall not be eligible for re-appointment as auditor in the same company for five years
from the completion of his term.
(2) An audit firm which has completed its term (i.e., two terms of five consecutive years)
shall not be eligible for re- appointment as auditor in the same company for five years from
the completion of such term.
(d) Further, as on the date of appointment no audit firm having a common partner or partners
to the other audit firm, whose tenure has expired in a company immediately preceding the
financial year, shall be appointed as auditor of the same company for a period of five years.
(e) Every company, existing on or before the commencement of this Act which is required to
comply with provisions of Section 139 (2), shall comply with the requirements of this Sub-
Section within three years from the date of commencement of this provision.
(f) It is also provided that nothing contained in this Sub-Section shall prejudice the right of
the company to remove an auditor or the right of the auditor to resign from such office of the
company.

First auditors [Section 139 (6)]

(a) Notwithstanding anything contained in Sub-Section (1), the first auditor of a company,
other than a Government Company, shall be appointed by the Board of directors within 30
days of the date of registration of the company and the auditor so appointed shall hold office
until the conclusion of the first annual general meeting.
(b) If the Board fails to exercise its powers i.e. appointment of first auditor, it shall inform the
members of the company and the company in general meeting may appoint the first auditor
within 90 days at an extra ordinary general meeting and such auditor shall hold office till the
conclusion of the first annual general meeting.

Appointment of auditors in case of Government Company or any other company having

controlled by State Government or Central Government [Sections 139 (5), 139 (7) and
139 (8)]
(a) As per Section 139 (5), the Comptroller and Auditor-General of India shall, in respect of a
financial year, appoint an auditor duly qualified to be appointed as an auditor of companies
under this Act in the case of:
(1) a Government company, or
(2) any other company owned or controlled, directly or indirectly, by the Central
Government, or by any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments.
(b) The auditor shall be appointed within a period of 180 days from the commencement of
the financial year. The auditor appointed shall hold office till the conclusion of the annual
general meeting.

Eligibility, qualifications and disqualifications of auditors (Section 141)

Qualifications of an auditor [Section 141 (1) & (2)]

(a) A person shall be eligible to be appointed as auditor of a company only if he is a
Chartered Accountant within the meaning of the Chartered Accountants Act, 1949.
(b) A firm whereof majority of partners practicing in India are qualified for appointment as
aforesaid may be appointed by its firm name to be auditor of a company.
(c) Where a firm including a Limited Liability Partnership is appointed as an auditor of a
company, only the partners who are chartered accountants shall be authorised to act and sign
on behalf of the firm.

Disqualifications of auditors [Section 141 (3)]

The following persons shall not be qualified for appointment as auditor of a company:
(a) A body corporate other than a limited liability partnership registered under the Limited
Liability Partnership Act, 2008.
(b) an officer or employee of the company.
(c) a person who is a partner, or who is in the employment, of an officer or employee of the
company.
(d) a person who, or his relative or partner
(1) is holding any security of or interest in the company or its subsidiary, or of its holding or
associate company or a subsidiary of such holding company:
Provided that the relative may hold security or interest in the company of face value not
exceeding 1,00,000 rupees as prescribed under the Company (Audit and Auditors) Rules,
2014.
The Company (Audit and Auditors) Rules, 2014 provides that a relative of an auditor may
hold securities in the company of face value not exceeding ` 1 Lac. Further, the above
condition shall, wherever relevant, be also applicable in the case of a company not having
share capital or other securities. If the relative acquires any security or interest above the
prescribed threshold i.e., ` 1 Lac, the corrective action to maintain the limits as specified
above shall be taken by the auditor within sixty days of such acquisition or interest.
(2) is indebted to the company, or its subsidiary, or its holding or associate company or a
subsidiary of such holding company, in excess of ` 5 Lacs, or
(3) has given a guarantee or provided any security in connection with the indebtedness of any
third person to the company, or its subsidiary, or its holding or associate company or a
subsidiary of such holding company, in excess of ` 1 Lac.
(e) a person or a firm who, whether directly or indirectly, has business relationship with the
company, or its subsidiary, or its holding or associate company or subsidiary of such holding
company or associate company. According to the Companies (Audit and Auditors) Rules,
2014, the term business relationship shall be construed as any transaction entered into for a
commercial purpose, except:
(1) commercial transactions which are in the nature of professional services permitted to be
rendered by an auditor or audit firm under the Act and the Chartered Accountants Act, 1949
and the rules or the regulations made under those Acts.
(2) commercial transactions which are in the ordinary course of business of the company at
arm‘s length price - like sale of products or services to the auditor, as customer, in the
ordinary course of business, by companies engaged in the business of telecommunications,
airlines, hospitals, hotels and such other similar businesses.
(f) a person whose relative is a director or is in the employment of the company as a director
or key managerial personnel.
(g) a person who is in full time employment elsewhere or a person or a partner of a firm
holding appointment as its auditor, if such persons or partner is at the date of such
appointment or reappointment holding appointment as auditor of more than 20 companies
other than one person companies, dormant companies and private companies having paid-up
share capital less than one hundred crore rupees.
(h) a person who has been convicted by a court of an offence involving fraud and a period of
10 years has not elapsed from the date of such conviction.
(i) any person whose subsidiary or associate company or any other form of entity, is engaged
as on the date of appointment in consulting and specialized services as provided in Section
144 (This Section deals with certain services not to be tendered by auditor).

Powers of Auditors [Section 143 (1)]

(a) Access to books of account and vouchers: Every auditor of a company shall have a right
of access at all times to the books of account and vouchers of the company, whether kept at
the registered office of the company or at any other place.
(b) Entitled to have necessary information and explanation: He shall be entitled to require
from the officers of the company such information and explanations as the auditor may
consider necessary or the performance of his duties as auditor.
(c) Matters of inquiry: The auditor may also inquire into the following matters, namely:
(1) Whether loans and advances made by the company on the basis of security have been
properly secured and whether the terms on which they have been made are prejudicial to the
interests of the company or its members.
(2) Whether transactions of the company which are represented merely by book entries are
prejudicial to the interests of the company.
(3) Where the company not being an investment company or a banking company, whether so
much of the assets of the company as consist of shares, debentures and other securities have
been sold at a price less than that at which they were purchased by the company.
(4) Whether loans and advances made by the company have been shown as deposits.
(5) Whether personal expenses have been charged to revenue account.
(6) Where it is stated in the books and documents of the company that any shares have been
allotted for cash, whether cash has actually been received in respect of such allotment, and if
no cash has actually been so received, whether the position as stated in the account books and
the balance sheet is correct, regular and not misleading.
(d) Access to record of all its subsidiaries: The auditor of a company which is a holding
company shall also have the right of access to the records of all its subsidiaries in so far as it
relates to the consolidation of its financial statements with that of its subsidiaries.

Duties of auditors [Sections 143 (2), (3) and (4)]

(a) The auditor shall make a report to the members of the company on the following:
(1) On the accounts examined by him, and
(2) On every financial statements which are required by or under this Act to be laid before the
company in general meeting. And
(b) The auditor while making the report shall take into account the provisions of the Act, the
accounting and auditing standards and matters which are required to be included in the audit
report under the provisions of this Act or any rules made thereunder or under any order made
under Section 143 (11).
(c) The auditor shall express his opinion of the accounts and financial statements examined
by him. He shall express the opinion which according to him and to the best of his
information and knowledge,
the said accounts, financial statements give a true and fair view of the state of the company‘s
affairs as at the end of its financial year and profit or loss and cash flow for the year and such
other matters as may be prescribed.
(d) The auditors’ report shall also state:
(1) whether he has sought and obtained all the information and explanations which to the best
of his knowledge and belief were necessary for the purpose of his audit and if not, the details
thereof and the effect of such information on the financial statements.
(2) whether, in his opinion, proper books of account as required by law have been kept by the
company so far as appears from his examination of those books and proper returns adequate
for the purposes of his audit have been received from branches not visited by him.
(3) whether the report on the accounts of any branch office of the company audited under
Sub- Section (8) by a person other than the company’s auditor has been sent to him under the
proviso to that Sub-Section and the manner in which he has dealt with it in preparing his
report.
(4) whether the company’s balance sheet and profit and loss account dealt with in the report
are in agreement with the books of account and returns.
(5) whether, in his opinion, the financial statements comply with the accounting standards.
(6) the observations or comments of the auditors on financial transactions or matters which
have any adverse effect on the functioning of the company.
(7) whether any director is disqualified from being appointed as a director under Sub-Section
(2) of Section 164.
(8) any qualification, reservation or adverse remark relating to the maintenance of accounts
and other matters connected therewith.
(9) whether the company has adequate internal financial controls with reference to financial
statement in place and the operating effectiveness of such controls.
(10) Such other matters as prescribed under Rule 11 of the Companies (Audit and Auditors)
Rules, 2014 which provides that the auditor‘s report shall also include their views and
comments on the following matters, namely:
(1) whether the company has disclosed the impact, if any, of pending litigations on its
financial position in its financial statement.
(2) whether the company has made provision, as required under any law or accounting
standards, for material foreseeable losses, if any, on long term contracts including derivative
contracts.
(3) whether there has been any delay in transferring amounts, required to be transferred, to
the Investor Education and Protection Fund by the company.
(e) Where any of the matters is answered in the negative or with a qualification, the auditor‘s
report shall state the reason for the answer.
(f) Compliance with auditing standards:
(1) Every auditor shall comply with the auditing standards [Section 143(9)].
(2) The Central Government may prescribe the standards of auditing or any addendum
thereto, as recommended by the Institute of Chartered Accountants of India, constituted under
Section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination
of the recommendations made by the National Financial Reporting Authority.
(3) It is further provided that until any auditing standards are notified, any standard or
standards of auditing specified by the Institute of Chartered Accountants of India shall be
deemed to be the auditing standards.
(g) Additional matters to be reported in case of specified companies: In respect of such class
or description of companies, as may be specified in the general or special order by the Central
Government may, in consultation with the National Financial Reporting direct, the auditor’s
report shall also include a statement on such matters as may be specified therein.

Punishment for contravention (Section 147)

(a) Penalty on company [Section 147 (1)]
If any of the provisions of Sections 139 to 146 (both inclusive) is contravened, the company
shall be punishable with fine which shall not be less than ` 10,000 but which may extend to `
1 lac.
(b) Penalty on officers [Section 147 (1)]
If any of the provisions of Sections 139 to 146 (both inclusive) is contravened, every officer
of the company who is in default shall be punishable with:
(1) imprisonment for a term which may extend to 1 year or
(2) With fine which shall not be less than ` 10,000 but which may extend to ` 1 lac,
(c) Penalty on auditor [Sections 147 (2) & (3)]
(a) If an auditor of a company contravenes any of the provisions of Section 139, Section 143,
Section 144 or Section 145, the auditor shall be punishable with fine which shall not be less
than ` 25,000 but which may extend to ` 5 lacs.
(b) If an auditor has contravened such provisions knowingly or willfully with the intention to
deceive the company or its shareholders or creditors or tax authorities, he shall be punishable
with:
(1) imprisonment for a term which may extend to 1 year and
(2) fine which shall not be less than ` 50,000 but which may extend to ` 25 lacs or eight times
of the remuneration of the auditor which ever is less.
(c) Further, where an auditor has been convicted as above, he shall be liable to:
(1) refund the remuneration received by him to the company, and
(2) pay for damages to the company, statutory bodies or authorities or to any other persons
for loss arising out of incorrect or misleading statements of particulars made in his audit
report.