What is it?
The Union Cabinet on March 1 approved the creation of a National Financial Reporting Authority (NFRA), a big step forward in regulating the financial audit of large companies.
The NFRA is to be an independent regulator overseeing the auditing profession, and its creation was first recommended by the Standing Committee on Finance in its 21st report.
The Cabinet also approved the creation of the posts within the regulator — that of a chairman, three full-time members, and one secretary — though no decision has yet been taken on who will fill these posts.
How did it come about?
While many provisions of the Companies Act, 2013 came into force on April 1, 2014, the setting up of the NFRA, a key recommendation, was delayed.
The decision appears to have been prompted by the latest bank scam to have hit the headlines — the ₹12,636 crore Punjab National Bank fraud that went undetected by auditors.
The Institute of Chartered Accountants of India (ICAI) had initially voiced its discontent with the idea of a regulator for the sector, saying the existing structure was adequate.
The government has clarified that the roles of the new regulator and those of the ICAI will not overlap.
While announcing the decision to create the body, Finance Minister Arun Jaitley said the NFRA would cover all listed companies and large unlisted companies, the benchmark size for which would be set down in the rules.
Smaller unlisted companies would continue to be audited by the ICAI, he said, adding that the Centre could also refer other entities for investigation “where public interest would be involved.”
The government also said the Quality Review Board (QRB) would continue quality audits for private limited companies, and public unlisted companies below the prescribed threshold.
The NFRA would also have the power to refer cases to the QRB as and when it decided to do so.
The government said the ICAI would continue to play its advisory role with respect to accounting and auditing standards and policies by making its recommendations to the NFRA.
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