By P.N. Shah
Chartered Accountant
1. Introduction
At present the Council of the Institute of
Chartered Accountants of India (ICAI) has power to ensure that its members
maintain discipline while discharging their professional and other duties.
Sections 21, 21A to 21D of the Chartered Accounts Act (CA Act) provide for
mechanism for conducting Disciplinary proceedings and for awarding punishment
to erring members of ICAI. Sections 22,22A to 22G of CA Act provide for filing
appeals before the Appellate Authority appointed u/s. 22. The First schedule to
the CA Act gives a list of Professional Misconduct by members in their dealings
with other members of ICAI or with the Institute. The Second Schedule to the
Act gives a list of Professional Misconduct by members in practice in their
dealings with their clients. Section 132
of the Companies Act, 2013 (Act), which has now come into force provides for
constitution of a “National Financial Reporting Authority” (NFRA). By a
Notification dated 21.03.2018 the Central Government has notified the
constitution of NFRA. U/s. 132 of the Act, NFRA is authorised to recommend to
the Central Government to notify Accounting and Auditing Standards as well as
to take disciplinary action against Auditors of some specified companies and
bodies corporate. This action can be taken against the Firms of Auditors as
well as against partners of the Firm. Thus an External Authority is now set up
to take disciplinary action against Auditors of specified entities. The existing powers of the Council of ICAI to
take disciplinary action against such Auditors is now taken away and entrusted
to the NFRA. However, ICAI will continue
to have powers regarding disciplinary matters in cases of Auditors of entities
other than specified entities.
The National Financial Reporting Authority Rules,
2018, have been notified on 13th November, 2018. These Rules have
come into force on 14th November, 2018. Significant changes have been made by section
132 of the Companies Act, 2013 and the above Rules in the matter of
disciplinary action against Auditors. In this article some of the important
provisions relating to disciplinary action that can be taken against Auditors
of specified entities by NFRA are discussed.
2. CONSTITUTION
OF NFRA
(i) Section
132(3) of the Act provides that NFRA shall consist of a Chairperson, who shall be a person of
eminence and having expertise in accountancy, auditing, finance or law and such
other members, not exceeding 15, consisting of part-time and full-time members
as may be prescribed.
(ii) NFRA
(Manner of Appointment and other Terms and Conditions of Service of Chairperson
and Members) Rules, 2018 notified on 21.03.2018 provide for various matters
relating to appointment, service conditions of Members of NFRA and other
matters. According to these Rules the Central Government has to appoint a
Chairperson, Three Full-Time Members and Nine Part-Time Members of NFRA. The
Rules provide for their qualifications, service conditions and other matters.
3. THE
POWERS OF NFRA
The powers which NFRA can exercise are listed in
section 132(4) as under:-
(i) Power
to investigate, either on its own or on a reference made by the Central Government, in case of
such class of bodies corporate or persons, as may be prescribed,
into the matters of professional or
other misconduct committed by a Chartered
Accountant or a Firm of Chartered Accountants. Once NFRA initiates this
investigation, ICAI or any other body will have no authority to initiate or
continue any proceedings in such matters of misconduct.
(ii) NFRA
shall have the same powers as vested in a Civil Court under Code of Civil
Procedure, 1908. In other words, it can issue summons, enforce attendance,
inspect books and other records, examine witnesses etc.
(iii) If
any professional or other misconduct is proved, NFRA can impose penalty as
under:
u
In the case of an individual CA, minimum penalty of Rs.1 lakh which may extend
to 5 times of the fees received by the individual.
u
In the case of a C.A. Firm, minimum penalty of Rs. 5 lakh which may extend to
10 times the fees received by the Firm.
u
NFRA can debar any Chartered Accountant or a CA Firm from practice for a
minimum period of six months or for such higher period not exceeding 10 years.
(iv) Any
person / firm aggrieved by any order of NFRA can file appeal before the
National Company Law Appellate Tribunal. This appeal can be made in such manner
and on payment of such fees as may be prescribed.
(v) The
above provisions of section 132 will override any provisions contained in any
other statute. This will mean that the Council of ICAI will not be able to
exercise its powers relating to disciplinary action against auditors of
specified entities. Even powers to formulate accounting and auditing standards,
ensure quality of audit etc., are now vested in NFRA. To this extent the autonomy conferred on ICAI
under the C.A. Act, 1949, is partially
taken away.
(vi) By a
Notification dated 13th November, 2018, the Central Government has
issued the “National Financial Reporting Authority Rules, 2018” (NFRA Rules).
These Rules specify the class of companies and bodies corporate governed by
NFRA for taking disciplinary action against Auditors of these entities, the
functions and duties of NFRA and other related matters. The provisions of these
Rules are discussed below.
4. CLASS OF
ENTITIES GOVERNED BY NFRA – (RULE 3)
(i) Rule 3
of NFRA Rules gives power to NFRA to (a) monitor and enforce compliance with
the Accounting and Auditing Standards,
(b) Oversee the quality of Service of the Auditor u/s. 132 (2), and (c)
Undertake investigation u/s. 132 (4) of Auditors of the following class of
Companies and Bodies Corporate (Specified Entities).
(a) All
Companies which are listed on Stock Exchanges in India or outside India.
(b) Unlisted
Public Companies having (i) paid-up capital of Rs. 500 crore or more, (ii) Turnover of Rs.1,000 crore, or more, or (iii)
Aggregate outstanding Loans, Debentures and Deposits of Rs. 500 crore or more
as at 31st March of the immediately preceding Financial Year.
(c) Insurance
Companies, Banking Companies, Companies engaged in Generation or Supply of
Electricity and Companies Governed by any Special Act or Bodies Corporate
incorporated by any Act in accordance with the provisions of section 1(4)(b) to
(f) of the Act.
(d) Any
Body Corporate or Company or person or any class of Bodies Corporate or
Companies or persons, on reference made to NFRA by the Central Government in
Public Interest. It may be noted that section 3 of the Limited Liability
Partnership Act, 2008 provides that an LLP registered under that Act is a Body
Corporate. Therefore, it appears that Auditors of any LLP, irrespective of its
capital, turnover or borrowings, will now be governed by the NFRA Rules if such
a case is referred to NFRA by the Government. Apparently, this does not appear
to be the intention of these Rules. We will have to wait for some clarification
from the Central Government in respect of this matter.
(e) A Body
Corporate incorporated or registered outside India which is a Subsidiary or
Associate Company of an Indian Company or a Body Corporate referred to in (a)
to (d) above, if the income or net worth of such subsidiary or Associate
Company exceeds 20% of the consolidated income or net worth of such Indian Company
or Body Corporate referred to in (a) to (d) above.
(ii) Auditors
of the above companies and bodies corporate have to file a return in the
prescribed form with NFRA on or before 30th April of every year
under Rule 5.
(iii) A
Company or a Body Corporate, other than a Company Governed under this Rule, shall continue to be governed by NFRA
for a period of 3 years after it ceases
to be listed or its paid-up capital, turnover, or aggregate borrowing falls
below the limits stated in (i) (b) above.
5. REPORTING
OF AUDITORS APPOINTMENT
The above Rule provides for reporting about
Auditors’ particulars by a Body Corporate as under:
(i) Every
existing Body Corporate, other than a Company Governed by this Rule, has to
inform NFRA, within 30 days (i.e. on or before 14th December, 2018),
particulars of Auditor holding office on 14th November, 2018 in Form
NFRA-1.
(ii) Every
Body Corporate, other than a Company governed by this Rule shall, within 15
days of the appointment of its Auditor u/s. 139(1), inform NFRA about the
particulars of its Auditor in Form NFRA-1.
(iii) Every
Body Corporate incorporated or registered outside India (as referred to in Para
4(i) (e) above) has also to file the particulars of its Auditors in Form NFRA
-1 within the above time limit.
It may be noted that if the NFRA Rules apply to an
LLP, irrespective of its capital, turnover or borrowings, all small and big
LLPs will have to file particulars of their existing Auditors on or before
14.12.2018 in Form NFRA-1. This is going
to be a difficult task for an LLP.
Similarly, a Foreign Body Corporate to which Rule 3 is applicable will
have to file Form NFRA-1 within the above time limit. The above Rule states
that particulars of Auditors appointed u/s. 139(1) of the Act are to be given.
It may be noted that section 139(1) refers to appointment of Auditors of
Companies registered under the Companies Act, 2013. It does not refer to
appointment of Auditors by a Body Corporate.
Further, Form NFRA-1 requires the Body Corporate to state whether the
Auditor’s appointment is within the limit of 20 Audits provided in section
141(3)(g) of the Act. This limit applies to 20 Audits of Companies and not to
Bodies Corporate. To this extent, compliance with the reporting requirements of
Rule 3(3) will become difficult. It is difficult to understand why such onerous
duty is cast on all Bodies Corporate including LLP and Foreign Bodies
Corporate. Further, the time limit of
one month from the publication of Rules is too short as most of the bodies
corporate may not be aware of this requirement. It is not understood as to what
public interest is going to be served by bringing the Auditors of all LLPs
under NFRA when Auditors of all Private Companies and most of the Public
Unlisted Companies are kept outside the purview of NFRA.
6. FUNCTIONS
AND DUTIES OF NFRA (RULE 4)
Section 132 (2) of the Act read with Rule 4 of
NFRA Rules provides for functions and duties of NFRA as under:
(i) NFRA
shall protect the public interest and interest of investors, creditors and
others associated with Companies and Bodies Corporate, listed under Para 4(i)
(a) to (f) above, by establishing high quality standards of accounting and
auditing.
(ii) NFRA
will exercise effective oversight of accounting functions performed by the
above companies and bodies corporate and auditing functions performed by the
Auditors of the above entities.
(iii) Maintain
particulars of Auditors appointed by the above companies and bodies corporate.
(iv) Recommend
Accounting Standards and Auditing Standards for approval by the Central
Government. For this purpose NFRA shall
receive from ICAI recommendations for modification of existing accounting and
auditing standards or for issue of new standards before making recommendations
to the Central Government.
(v) Monitor
and enforce compliance with the Accounting and Auditing Standards notified by
the Central Government.
(vi) Oversee
the quality of service of Auditors associated with ensuring compliance with the
above standards and suggest measures for improvement in the quality of service.
(vii) Promote
awareness in relation to the compliance of the Accounting and Auditing standards. For this purpose it may
co-operate with National and International Organisations of Independent Audit
Regulators to establish and oversee adherence to these standards.
(viii) Perform
such other functions and duties as may be necessary or incidental to the above
functions and duties.
(ix) Discharge
such functions as may be entrusted by the Central Government by Notification.
7. MONITORING
AND ENFORCING COMPLIANCE WITH ACCOUNTING STANDARD (RULE 7)
For discharging this function, NFRA has the
following powers:
(i) It may
review the Financial Statements of the above specified entities and may issue a
notice to such Entity or its Auditor to provide further information or
explanation. It may also call for
production of the relevant documents for inspection.
(ii) It
may require personal presence of the officers of the Entity or its Auditor for
seeking additional information or explanation.
(iii) It
shall publish its findings relating to non-compliance by any such entity on its
website or in such other manner as it considers fit.
(iv) If, in
a particular case, NFRA finds that any Accounting Standard is not followed, it
can decide on the further course of investigation.
8. MONITORING
AND ENFORCING COMPLIANCE WITH AUDITING STANDARDS (RULE 8)
For discharging the above function, NFRA has the
following powers relating to the Auditors of the specified entitie:
(i) To
review the working papers of Auditors, including the Audit Plan and other Audit
Documents as well as any communication relating to the Audit.
(ii) To
evaluate the sufficiency of the quality control system of the Auditor and the
manner of documentation of the system by the Auditor.
(iii) To
perform such other testing of the audit, supervisory and quality control
procedures of the Auditor as may be considered necessary or appropriate.
(iv) It may
require the Auditor to report on its governance practices and internal
processes designed to promote audit quality, protect its reputation and reduce
risks, including risk of failure of the Auditor. It may take such action on this report as may
be necessary.
(v) NFRA
can require the Auditor to appear before it personally and obtain from him
additional information or explanation in connection with the conduct of the
Audit.
(vi) NFRA
shall publish its findings relating to non-compliance with the Auditing
Standards on its website or in such manner as it considers fit. In respect of proprietary or confidential
information, such publication will not be made but the same may be reported to
the Central Government.
(vii) In a
case where NFRA finds that any law or professional or other standard has been
violated by the Auditor, it may decide to conduct further investigation and
take action against the Auditor.
9. OVERSEEING
THE QUALITY OF SERVICE BY THE AUDITOR (RULE 9)
(i) On the
basis of the review made by NFRA, as stated above, it can direct the Auditor to
take measures for improvement of audit quality. This may include suggestions to
change the audit process, quality control and audit reports. It may also specify a detailed plan with time
limits.
(ii) It
shall be the duty of the Auditor to make the required improvements and send a
report to NFRA explaining as to how he has complied with the directions of
NFRA.
(iii) NFRA
shall monitor the improvements made by the Auditor and take such further
action, depending on the progress made by the Auditor, as it thinks fit.
(iv) NFRA
may refer, with regard to overseeing the quality of Auditors of the specified
entities, to the Quality Review Board (QRB) of ICAI and call for a report or
information in respect of such Auditors from QRB as it may deem appropriate.
10. INVESTIGATION
ABOUT PROFESSIONAL OR OTHER MISCONDUCT (RULE 10)
(i) NFRA
has power to investigate in the following circumstances.
(a) Where
any reference is received from the Central Government for investigation into
any matter of professional or other misconduct u/s. 132(4) as stated in Para 3
above.
(b) Where
NFRA decides to undertake investigation into any matter on the basis of its
compliance or oversight activities.
(c) Where
NFRA decides to undertake investigation suo motu in any matter of
professional or other misconduct by the Auditor of the specified entities
(ii) If
during the investigation, NFRA finds that any of the specified entities has not
complied with the Act or the Rules or which involves fraud amounting to Rs. 1
crore or more, it shall repot its finding to the Central Government.
(iii) On or
after 14th November, 2018, the action in respect of cases of
professional or other misconduct against the Auditors of specified entities
shall be initiated by NFRA only. No
other Institute or Body can initiate such action against the Auditor. Further,
no other Institute or Body shall initiate or continue any proceedings in such
cases where NFRA has initiated an investigation as stated above. This will mean
that if any case against the Auditor of a specified entity is pending before
ICAI on 14.11.2018, the same will have
to be transferred to NFRA if NFRA decides to investigate in the same matter.
(iv) The
action in respect of cases of professional or other misconduct against Auditors
of companies and other entities (other than the specified entities) shall
continue to be investigated by ICAI as provided in the CA Act.
(v) For the
above purpose Explanation below section 132(4) provides that the expression
“Professional or other Misconduct” shall have the same meaning as assigned to
it u/s. 22 of the Chartered Accountants Act. Therefore, NFRA will have to
decide such cases of misconduct as
provided in section 22 and the First and Second Schedules of the C.A. Act.
(vi) It may
be noted that Rule 10 provides that NFRA shall initiate investigation against
the Auditors of specified entities u/s. 132(4) on a reference being made by the
Central Government. There is no provision
for investigation by NRFA on the basis of a compliant by a shareholder,
creditor or any other person who has a grievance against Auditors of the
specified entities. It is, therefore,
presumed that such complaints by shareholders, creditors etc., will have to be
investigated by ICAI under its Disciplinary Jurisdiction.
11. DISCIPLINARY
PROCEEDINGS (RULES 11 AND 12)
The procedure for conducting Disciplinary
Proceedings by NFRA against Auditors of specified entities is given in Rule 11
and 12. Briefly stated, this procedure
is as under:
(i) NFRA
can start disciplinary proceedings against Auditors of specified entities on
the basis of (a) a reference received from the Central Government, (b) finding
of its Monitoring, enforcement or oversight activities, or (c) material
otherwise available on record. If NFRA believes that sufficient cause exists to
take action against the Auditors u/s. 132(4), it shall refer the matter to its
concerned Division dealing with Disciplinary matters. This Division will then
issue show-cause notice to the Auditors.
(ii) Rule
11(2) and 11(3) specifies the various matters which will be stated in the
show-cause notice. Copies of documents relied upon by NFRA and extracts of
relevant portions from the Report of the Investigation and other records are to
be enclosed with the show-cause notice.
The procedure for service of show-cause notice is given in Rule 11(4).
(iii) Rule
11(5) states that the concerned Division shall dispose of the show-cause notice
within 90 days of the assignment through a summary procedure as may be
specified by NFRA. The concerned Division will pass a reasoned order in
adherence to the principles of natural justice.
For this purpose, where necessary or appropriate, opportunity of being
heard in person will be given. The concerned Division will also take into
consideration the submissions made by the Auditors and the relevant facts and
circumstances and material on record before passing the order. There is no
clarity whether the hearing will be given by a Bench of the members of NFRA and
whether the above order will be passed by such Bench. Again, it is not clear as
to how many members of NFRA will constitute such Bench.
(iv) The
above order passed by the concerned Division of NFRA shall specify that (a) No
further action is to be taken against the Auditors, (b) Caution the Auditors,
or (c) Punishment by levy of penalty and/or debarring the Auditors from
practice is awarded as specified in section 132(4). Such Penalty may be as
stated in Para 3(iii) above. The above
order shall not become effective for a period of 30 days from the date of issue
or for such other period as the order may specify for the reasons given in the
order.
v) The
above order has to be served on the Auditors and copies of the order have to be
sent by NFRA to (a) the Central
Government, (b) ICAI, (c) C & AG (if the case relates to Auditors of
a Government Company), (d) SEBI (if the
case relates to Auditors of a listed Company), (e) RBI (if the case relates to
Auditors of a Bank or NBFC), (f) IRDA (if the case relates to Auditors of an
Insurance Company), (g) Concerned regulator in
a foreign country (if the case relates to a Non-Resident Auditor). Further this order is to be published on the
Website of NFRA.
(vi) If the
above order imposes a monetary penalty on the Auditors the same is to be
deposited within 30 days of the date of the order. If appeal is filed against
the above order by the Auditor, he has to deposit 10% of the amount of the
penalty with the Appellate Tribunal. If within 30 days of the above order the
Auditor does not pay the penalty nor file appeal against the order, NFRA,
without prejudice to any other action, will inform the Company / Body Corporate
of which he was the Auditor. Upon receipt of such intimation the Company / Body
Corporate shall remove such Auditor in default and appoint any other Auditor in
accordance with the provisions of the Act.
(vii) If the
order imposes a penalty on the Auditor or debars the Auditor from practice,
NFRA will send copies of such order to all Companies / Bodies Corporate in
which the Auditor is functioning as Auditor. On receipt of such information,
all such Companies / Bodies Corporate shall remove that Auditor from his
position as Auditor and appoint another Auditor in accordance with the
provisions of the Act.
(viii) In all
the above cases where the order of NFRA is stayed or where penalty is to be
paid, the time limit of 30 days is from the date of the order. Since the time
given u/s. 421 for filing appeal to the Appellate Tribunal is 45 days from the
date of service of the order, Rule 11 and 12 should have given time to the
Auditor of 45 days for payment of penalty from the date of service of the order
of NFRA. Further, as stated in (vi) and
(vii) above, Rule 12 provides for intimation to be given to the specified
companies or bodies corporate about the order of NFRA awarding punishment by
way penalty or debarring the Auditor
from practice so that he is removed from his office as auditor in that company
/ body corporate. In the interest of justice, such intimation should not be
given by NFRA if the appeal filed by the Auditor before judicial authorities is
pending. Again, it may so happen that the action is taken by NFRA for
professional or other misconduct by an Individual who is one of the partners of
a Firm of Chartered Accountants. In such a case if the penalty is levied in the
case of that Individual or he is debarred from practice, the Firm of Chartered
Accounts which is the Auditor of the company / body Corporate should not be removed
from its office as Auditor of that company / body corporate. The provision in
Rule 12 to remove the Auditor from his position as Auditor of a company / body
corporate in a case where only penalty is levied by NFRA is very harsh and
needs to be modified.
12. OTHER
MATTERS
(i) Rule
13 provides that if any company or any officer of the company or an Auditor or
any other person contravenes any of the provisions of these Rules, such
company, its officer, Auditor or other person in default shall be punishable
under the provisions of section 450 of the Act. This section provides for levy
of Fine on the defaulting company, officer, Auditor or other person of an
amount upto Rs.10,000 and in case of continuing default, of a further Fine
which may extend to Rs.1,000 per day when the default continues.
(ii) Rules
14 to 19 provide for various matters such as (a) Role of the Chairperson and
full-time members of NFRA, (b) Constitution of advisory committees, study
groups, task force, (c) Measures to be taken for the promotion of awareness and
significance of Accounting and Auditing Standards, Auditor’s Responsibilities,
Audit Quality and such other matters through education, training, seminars,
workshops, conferences, publicity etc., (d) Maintenance of confidentiality and security of information, (e) Avoidance of
conflict of interest and (f) Association with International Associations and
securing International Assistance.
13. TO SUM UP
(i) NFRA
is established as an External Authority for taking Disciplinary Action against
Auditors by section 132 of the Companies Act, 2013. There was some resistance
by the CA profession and, therefore, this section was not brought into force
when the Companies Act, 2013 came into force on 1.4.2014. Section 132(3) and
(11) was brought into force on 21.03.2018. Section 132(1) and (12) came into
force on 01.10.2018 and section 132(2), (4), (5), (10) (13) (14) and (15) came
into force on 24.10.2018. S/s. (6) to
(9) were deleted w.e.f. 9.2.2018.
(ii) The
justification for creating such External Authority (NFRA) is given by the
Committee of Experts, appointed by the Ministry of Corporate Affairs, in their
Report dated 25.10.2018. In this Report they have stated as under:
“In the aftermath of Enron, the U.S. enacted
the Sarbanes Oxley Act, 2002. The Supreme Court in its judgment dated February
23, 2018 has referred to this statute to examine the need of an oversight
mechanism for the audit profession. This law inter alia provided for the
setting up of the Public Company Accounting Oversight Board (PCAOB) as an
independent audit regulator to oversee the audits of public companies.
Similarly, U.K. also has a two-tier structure, where the Financial Reporting
Council (FRC) is the independent regulator for the audit profession.
In the Indian context, the Satyam incident has
been a wake-up call for policy-makers. Pursuant to the global trend of shift
from Self-Regulatory Organisation (SRO) model to an independent regulatory
model for the audit profession, the Companies Act, 2013 provided for the setting
up of the National Financial Report Authority (NFRA).
However, the continued opposition to the
establishment of NFRA has delayed the implementation of this critical reform.
Consequently, although the Companies Act, 2013 was enacted in August 2013, the
section establishing NFRA was notified
only on March 21, 2018 along with the NFRA Chairperson and Members’
Appointment Rules, 2018. Once NFRA becomes fully operational, it will be
adequately equipped to handle the contemporary challenges in relation to
auditors, audit firms and networks operating in India.”
(iii) Reading
the provisions of section 132 of the Act and the above NFRA Rules framed by the
Central Government, it is evident that the autonomy of ICAI to issue Accounting
and Auditing Standards and taking disciplinary action in cases of erring
members is now curtailed. The function of ICAI will be restricted to only
recommending changes in the existing Accounting and Auditing Standards or
Suggesting new Standards. Whether to issue such Standards or not or in which
form they should be issued will be decided by NFRA and the Central Government.
Even the function of monitoring, enforcing, compliance, overseeing quality of
service rendered by the CA profession,
suggesting measures for improvement in quality of professional service,
promoting awareness in relation to the compliance of Accounting and Auditing
Standards which was hitherto in the domain of ICAI, has been transferred to
NFRA. Disciplinary jurisdiction which
was hitherto within the domain of ICAI has now been curtailed because NFRA is
now entrusted with the task of taking disciplinary action against the Auditors
of all listed companies, large unlisted Public Companies, Banks, Insurance
Companies Electricity Companies and Bodies Corporate. These provisions will
reduce the importance of ICAI as it is now left with the task of giving
education to students of CA Courses, conducting examinations and awarding
membership and Certificate of Practice to those who have passed the
examinations. Even the measures to be
taken for the promotion of awareness and significance of Accounting and
Auditing Standards, Auditors Responsibilities, Audit Quality and such other matters through education,
training, Seminars, Workshops, Conferences and Publicity which were in the
exclusive domain of ICAI, its Regional
Councils and Branches will now come under the domain of NFRA under Rule 16.
(iv) From
the above analysis of the provisions of section
132 of the Act and NFRA Rules it is evident that Auditors of the specified companies and bodies corporate will have to
be more vigilant while rendering their
professional services to these entities. Some questions of interpretations will
arise during the course of implementation of these Rules. Therefore, it is necessary that a strong
representation is made for modification of these Rules in respect of the
following matters:
(a) In Rule
3 it should be clarified that the expression “Body Corporate” shall not include
LLP. In fact no public interest is involved in the case of an LLP and,
therefore, Auditor of LLP should not be brought within the supervision of NFRA.
b) In Rule
3(2) it is provided that every existing body corporate should file Form NFRA-1
giving details of its Auditors within 30 days of publication of these Rules.
This time limit is too short and it should be extended up to 90 days from the
date of publication of the Rules (i.e. up to 14.02.2019).
(c) In Rule
10 it is necessary to clarify that the Investigation by NFRA about the
misconduct of the Auditors of any specified entity shall be only in respect of
their conduct relating to statutory audit of the entity. In this Rule the
expression used is “Professional or Other Misconduct”, which is very wide. It
includes conduct of an Auditor in his personal life as well as his conduct while rendering professional
services other than the Audit Service.
(d) In Rule
10 it is stated that the NFRA will start investigation against the Auditor of
specified entities on a reference being made by the Central Government or on its
own on the basis of the available records. It is essential that this Rule
should provide that any shareholder of a specified company or its creditor or
any other person can approach NFRA if there is a complaint against the Auditor
of a specified entity.
(e) In
Rules 11 and 12, for the reasons stated in Para 11 (viii) above, the period of
30 days should be increased to 45 days. Further, information about the order
passed by NFRA should not be given to specified entities if the Auditor has
filed appeal against the order of NFRA and the judicial proceedings are
pending.
(f) As
stated in Para 11(viii) above, if the order passed by NFRA is against the
conduct of an Individual who is a Partner of the Audit Firm and no punishment
is awarded to the Firm, the disqualification as auditor of the specified entity
should not extend to the Firm.
(g) Rule 11
deals with Disciplinary Proceedings to be followed by NFRA or making inquiry
against the Auditor of a specified entity. There is no clarity as to who will
give hearing to such Auditor. It is necessary to clarify that such hearing will
be given by a Bench of two or three Members of NFRA. It is also necessary to clarify that any
Authorised person or Advocate will be allowed to assist such Auditor at the
time of hearing.
(v) Establishment of NFRA with such wide
powers is a new experiment in India. As these provisions will have retroactive
application, in as much as matters relating to earlier years may also be
referred to NFRA, let us hope that NFRA takes into consideration the
limitations within which the Auditors have to discharge their Audit function
and adopts a sympathetic view while dealing with the disciplinary cases against
such Auditors.
