There was much hope when the finance minister announced the setting up of the NFRA. The
Centre’s notification of March 21 regarding its composition has, unfortunately, put paid to that
Background of NFRA –
The NFRA was first proposed as an independent regulator of accounting and auditing in the wake
of the Satyam scandal which went undetected for many years by the company’s auditors. There
was a public outcry and calls for a complete overhaul of the regulation of the accounting and
auditing profession in India.
In 2010, the report of the Standing Committee on Finance of the Lok Sabha on the Companies Bill
2009 recommended the creation of a supervisory mechanism with a “mandate not only to set and
oversee accounting and auditing standards, but also to monitor the quality of audit undertaken
across the corporate sector”. As a result, the Companies Act 2013 included Section 132 relating to
In 2016, the Standing Committee on Finance of the Lok Sabha on the Companies (Amendment)
Bill 2016 recommended that the excising mechanism under the ICAI Act “should be strengthened
and streamlined without needlessly adding to regulatory levels”. This could have aborted the
NFRA. The committee’s recommendation came in the face of the strong case made for the NFRA
by the Company Law Committee and the ministry of corporate affairs (MCA), and the earlier
Standing Committee. This speaks volumes about the ICAI’s lobbying power. Fortunately, the MCA
stood its ground on the need for the NFRA, though it was not set up.
The scene changed drastically after Prime Minister Narendra Modi gave CAs a rap on the knuckles
in his speech on Chartered Accountants’ Day on July 1, 2017. The speech strongly hinted at CAs’
involvement in money-laundering and tax evasion and highlighted the ICAI’s poor record of
disciplining its members. Later in March 2018, NFRA was announced.
The composition of NFRA –
Unfortunately, the composition of the NFRA, which will consist of a chairperson, three full-time
members and nine part-time members, suggests that it may not be fully independent.
The part-time members will be one each to represent the MCA, the Comptroller and Auditor-
General of India, the Reserve Bank of India, and the Securities and Exchange Board of India, three
from the ICAI — president, chairperson of Accounting Standards Board and chairperson, Auditing
and Assurance Standards Board — and two experts from the field of accountancy, auditing,
finance, or law.
The inclusion of three members from the ICAI’s council is intriguing. The Companies Act 2013 has
no such requirement. Having three members from the ICAI is not the best way to reassure the
consumers of the services of auditors about the independence of the audit regulator.
Interestingly, the rules require the chairperson and all members to submit a declaration of no
conflict of interest or lack of independence. The members drawn from the ICAI’s council are
practising CAs and by virtue of their activities as auditors or advisers to their clients and others
they are certain to be conflicted and lack independence.
The separation of the regulator from those it regulates is a fundamental principle of good
governance. There is no instance of a regulatory body having representatives of those regulated.
Arm’s length relationship between the regulator and the regulated is essential to prevent undue
influence on the regulator. Formal independence of the regulator is necessary to maintain trust and
public confidence. Allowing the industry association’s representatives to have a say in the working
of the NFRA is like letting the fox guard the hen-house.
Narendra Modi government should be lauded to bring to the reality a significant demand of an
independent regulator (NFRA) to regulate the auditors and ICAI to prevent unbridled access of
power without responsibility of auditor organisations. Is the NFRA as independent as it should be?
Let us see.
NFRA has a conflict in its composition as her regulatory powers are exercised by the same people
whom it should regulate. Comment.
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