The Companies Act, 2013, provides for formation of the National Financial Reporting Authority (NFRA) under section 132, whose subsection (2) provides that notwithstanding anything contained in any other law being in force, NFRA shall:
(a) Make recommendations to the 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, as the case may be;
(b) Monitor, enforce compliance with accounting and auditing standards in such manner as may be prescribed;
(c) Oversee quality of service of professions associated with ensuring compliance with such standards and suggest measures required for improvement in quality of service and such other related matters as may be prescribed; and
(d) Perform such other functions relating to clauses (a), (b) and (c) as may be prescribed.
The Statement of Objects of the Companies Bill, 2011, provided that a National Advisory Committee on Accounting Standards (NACAS) is proposed to be renamed as NFRA with “a mandate to ensure monitoring and compliance of accounting and auditing standards and to oversee quality of service of professionals associated with compliance.”
The Institute of Chartered Accountants of India (ICAI) was set up in 1949 in accordance with the provisions of the Chartered Accountants Act, 1949. This Act was enacted for making provisions for the regulation of the profession of chartered accountant and, inter alia, provided for the maintenance of register of members who were to be referred to as a CA in accordance with the definition in section 2 of the aforesaid Act. It also provides for the issuance of certificate of practice to various members, and defines who would be considered a member in practice. ICAI, as the statutory body for independent regulation of the profession, has set up the Disciplinary Directorate (deals with cases arising out of professional misconducts of members), Accounting Standards Board (deals with the formulation of accounting standard and the promotion thereof), Auditing & Assurance Standards Board (deals with the formulation of auditing and assurance standards), Peer Review Board (reviews workings of practising CAs), Financial Reporting Review Board (looks into financial statements of large listed public companies selected on a random basis), Ethical Standards Board (lays down professional ethics that need to be complied by CAs) and Continuing Professional Education Committee (responsible for educating members in the profession and in service).
ICAI is the apex body for the regulation of the profession of CA. There have been news reports that draft rules sent to ICAI for its comments seek to give almost all the powers exercised by ICAI to NFRA, which is not in accordance with the assurance given to ICAI by standing committees that considered the Companies Bill, 2011. The background for the creation of NFRA, as suggested to ICAI, was to replace NACAS, oversee monitoring and compliance of accounting and auditing standards, and oversee quality of service of professionals associated with such compliance.
If these reports are correct, then instead of an oversight body as originally envisaged, NFRA might become another authority for formulation of accounting and auditing standards. This goes against the basic principle that the ministry of corporate affairs (MCA) cited when NACAS was formed. It would be worthwhile to recall that the Parliamentary Standing Committee has mentioned that multiple structures shall not be established, and if at all they are, the interest of ICAI shall be taken care of. MCA has stated NFRA shall follow up procedures that shall be fair to all concerned stakeholders. The members at large have expressed apprehension that, in the disguise of NFRA, the government intends taking control over ICAI, leaving it only with registration of students and conduct of examinations. They have also expressed a fear that, in the long run, even exams and registration of students would be made a part of the Union Public Service Commission, thus nullifying the objective of the setting up of ICAI.
NFRA is being looked at as a regulator that is being given powers through rules. SEBI/RBI have stated they will oversee whether CAs have complied with SEBI regulations, RBI directions. It seems the profession has become a scapegoat for all such regulators with regard to financial matters and both these authorities seem to be interested in making own regulations with regard to the compliances that are required to be followed by listed companies and banks for preparation of financial statements. The situation might lead to a dwindling number of professionals who would be prepared to take the risk of being over regulated by various authorities.
By Sanjay Vasudeva, Chartered Accountant