INDIA Trends and Developments Contributed by: Vijayendra Pratap Singh, Priyank Ladoia, Shubhangni Jain and Arjun Narang, AZB & Partners
National Fraud Reporting Authority – the New Sheriff in Town Introduction In today’s complex business landscape, auditors act as guardians of financial integrity. Their role goes beyond merely verifying numbers – they are crucial in detecting and preventing fraud, ensuring transparency and upholding public confidence in financial markets worldwide. There has been a worldwide shift in the meas - ures for the regulation of auditors, from the self- regulatory model towards creation of independ - ent oversight bodies. This trend dates back to the aftermath of the Enron scandal in the early 2000s, which led to the enactment of the Sar - banes Oxley Act in 2002, and the creation of the Public Company Accounting Oversight Board in the United States of America. Even the United Kingdom set up its Financial Regulatory Com - mission in April 2004. A similar need for change in the model of regula - tion was prompted in India by the Satyam scam which shocked the nation in 2009, serving as a wake-up call for policymakers. A need was felt for regulation of audit firms and to bring audit - ing norms in India on par with prevailing global standards. While Section 132 of the Companies Act, 2013 (the “Companies Act” ) provided for the establishment of the National Fraud Reporting Authority (NFRA), its constitution was only noti - fied on 1 October 2018, and provision only came into force on 24 October 2018. This delay was primarily due to opposition from the Institute of Chartered Accountants of India, which resisted the move as it significantly curtailed its jurisdic - tional oversight. The NFRA was constituted with the objective of protecting the public interest and the interests of investors, creditors and others associated
with the companies or bodies corporate that are under the jurisdiction of the NFRA, by estab - lishing high-quality standards of accounting and auditing, and by exercising effective oversight of accounting functions performed by the compa - nies and bodies corporate and of the auditing functions performed by auditors. To fulfil this mandate, the NFRA stands empow - ered to: • make recommendations to the central gov - ernment on formulation of accounting and auditing policies; • monitor and enforce compliance with accounting and auditing standards; and • oversee the quality of service of the profes - sions associated with ensuring compliance with such standards. The NFRA is also authorised to investigate and impose penalties for professional or other mis - conduct by any member or firm of chartered accountants registered under the Chartered Accountants Act, 1949 (the “CA Act” ), concern - ing the specified class of companies or body corporates. The power to investigate can be exercised either suo moto or on reference from the Union Government over any misconduct committed by a statutory auditor. These powers can be exercised by the NFRA over, inter alia: • companies whose securities are listed on any stock exchange in India or abroad; • unlisted public companies having a paid-up capital of not less than INR1,500 crores or having an annual turnover of not less than INR1,000 crores, or in aggregate having out - standing loans, debentures and deposits of not less than INR1,500 crores; and
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