Auditors’ Auditor: NFRA

GOVERNANCE/ ECONOMY

• GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
• GS-3: Indian Economy and issues relating to it.

Auditors’ Auditor: NFRA

Context: The National Financial Reporting Authority (NFRA) will be headless from October 1 if the government does not announce, either a successor or another term, to the incumbent Chairman.

What is NFRA?

• NFRA came into being in late-2018 in the wake of the IL&FS financial scandal.
• The NFRA is a national regulator for auditors set up under the Companies Act, 2013.
• NFRA was born due to the failure of self-regulation of the audit profession by the Institute of Chartered Accountants of India (ICAI).
• It was set up specifically to investigate the role of auditors in frauds in listed and large public interest entities.
• It came into being in late-2018 in the wake of the IL&FS financial scandal.
• Composition – NFRA will have a chairperson who will be appointed by the Central Government and a maximum of 15 members. 
• An important function of NFRA is to make recommendation to 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.
• With the establishment of NFRA, audit practices were put under the scanner with such serious intent 

Do You Know?

• India is unique among the big economies of the world in statutorily mandating compulsory audit for all companies, irrespective of their size and characteristics. 
• Major economies of the world require statutory audit for small companies only in case some minimum criteria of public interest are satisfied. 
• Even in India, income tax audit is now not compulsory where the turnover is Rs. 10 crore or less provided not more than 5% of the transactions are in cash. GST audit has also been completely done away with.

What are the challenges in effective functioning of NFRA?

• Functioning with a skeletal staff: Apart from the Chairman there is just one whole-time director on the board, and three part-time directors who are nominees of ICAI
• Conflict of interest: NFRA board is unique in that it has representation from the constituency (nominee of ICAI) that it seeks to regulate.  It is akin to the SEBI having stock brokers on its board or the RBI appointing practising bankers as Deputy Governors.

Way Ahead

• The ICAI’s efforts to capture the regulatory body through appointments of its office-bearers as part-time directors should be rebuffed.
• The NFRA is at the crucial take-off stage now and it needs an independent head who is not an ex or present office-bearer of ICAI.
• With greater participation of retail investors in the stock market and increasing shareholder activism, we need a strong, autonomous regulator who can keep auditors in check and help develop the auditing profession. 

Connecting the dots:

• Laxmi Vilas Bank Crisis
•  Yes Bank Crisis