Section 132 - National Financial Reporting Authority (NFRA)
# Section 132 - National Financial Reporting Authority (NFRA)
## Constitution
The Central Government shall constitute the National Financial Reporting Authority (NFRA) by notification.
## Functions of NFRA
1. Recommend policies on accounting and auditing standards to be adopted by companies, auditors etc., to the Central Government.
2. Monitor and enforce compliance with accounting standards and auditing standards.
3. Oversee the quality of service of professionals (auditors, CAs etc.) and suggest improvements.
4. Perform other functions as may be prescribed - including:
Inspection of statutory auditors of large companies.
## Constitution / Composition
Chairperson: Appointed by Central Government (person of eminence in accountancy, auditing, finance or law).
Members: Not more than 15 members (including chairperson) consisting of:
Full-time members
Part-time members
## Declaration by Chairperson and Members
Upon appointment, the chairperson and members shall make a declaration to CG:
Regarding no conflict of interest and lack of independence in their appointment.
They shall not be associated with any audit firm (including related consultancy firms) during their term of appointment and for 2 years after ceasing to hold office.
## Disciplinary Powers of NFRA
NFRA has powers similar to a Civil Court for:
Discovery and production of books/documents
Inspection of books, registers etc. at any place
Enforcing attendance of persons and examining them on oath
### Reference for Professional or Other Misconduct
The terms 'professional or other misconduct' shall have the same meaning as under the Chartered Accountants Act, 1949.
### Important Note on Concurrent Jurisdiction
When NFRA initiates investigation in any matter:
No other institute or body shall initiate or continue any proceedings in such matters of misconduct.
Once NFRA is seized of the matter, ICAI etc. cannot proceed.
## Penalties Imposed by NFRA
### For Individuals:
Minimum: Rs. 1,00,000
Maximum: 5 times the fees received
### For Firms:
Minimum: Rs. 5,00,000
Maximum: 10 times the fees received
### Debarment:
NFRA may debar the member or firm from:
Being appointed as auditor
Being appointed for internal audit, concurrent audit, etc.
Performing any valuation under Section 247
For a period from 6 months to 10 years as decided by NFRA.
Insurance/Banking/Electricity companies - statutory governing law/regulator may require
Body corporate or person referred to NFRA by CG in public interest
## Appeal
Aggrieved persons may appeal to the Appellate Tribunal within prescribed time.
Worked example
### Example 1
Example 1: Mr. A, a partner of a CA firm auditing a listed company, is appointed as a part-time member of NFRA. Is this valid?
Answer: No. Members of NFRA cannot be associated with any audit firm (including related consultancy firms) during their term and for 2 years after ceasing to hold office. Mr. A must dissociate from the audit firm before accepting NFRA appointment.
### Example 2
Example 2: ICAI's Disciplinary Committee initiates proceedings against CA Mr. X for misconduct in auditing a listed company. NFRA also takes up the same matter for investigation. Can both proceed simultaneously?
Answer: No. Once NFRA initiates investigation in any matter, no other institute or body (including ICAI) shall initiate or continue any proceedings in such matters of misconduct. ICAI must drop its proceedings.
### Example 3
Example 3: NFRA finds CA Firm 'ABC & Co.' guilty of professional misconduct having received audit fees of Rs. 20 lakh. What is the maximum penalty?
Answer: For firms, the penalty is minimum Rs. 5 lakh and maximum 10 times the fees received. Hence maximum penalty = 10 × Rs. 20 lakh = Rs. 2 crore. NFRA may additionally debar the firm from being appointed as auditor for a period from 6 months to 10 years.
### Example 4
Example 4: Unlisted company DEF Ltd. has paid-up capital of Rs. 600 crore and turnover of Rs. 800 crore. Is its auditor subject to NFRA jurisdiction?
Answer: Yes. NFRA jurisdiction extends to unlisted public companies with paid-up capital of Rs. 500 crore or more (DEF has Rs. 600 cr ≥ Rs. 500 cr). Only one threshold needs to be crossed.
⚠️ Common exam mistakes
Confusing penalty limits - for individuals it is Rs. 1 lakh to 5x fees; for firms it is Rs. 5 lakh to 10x fees.
Forgetting the 2-year cooling period after ceasing NFRA membership during which one cannot be associated with audit firms.
Missing that ICAI cannot proceed once NFRA initiates - this is exclusive jurisdiction.
Confusing the unlisted public company thresholds - any ONE threshold (paid-up Rs. 500 cr / turnover Rs. 1000 cr / loans-debentures Rs. 500 cr) attracts NFRA.
Thinking maximum members is unlimited - it is capped at 15 (including chairperson).
Forgetting that debarment period under Section 132 ranges from 6 months minimum to 10 years maximum.
Bare-Act text Section 132 · Companies Act, 2013 · click to expand
Section 132 - Constitution of National Financial Reporting Authority:
(1) The Central Government may, by notification, constitute a National Financial Reporting Authority to provide for matters relating to accounting and auditing standards under this Act.
(2) Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority 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 their auditors;
(b) monitor and enforce the compliance with accounting standards and auditing standards;
(c) oversee the quality of service of the 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.
(4)(c) where professional or other misconduct is proved, have the power to make order for—
(A) imposing penalty of—
(I) not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and
(II) not less than five lakh rupees, but which may extend to ten times of the fees received, in case of firms;
(B) debarring the member or the firm from—
(I) being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or
(II) performing any valuation as provided under section 247, for a minimum period of six months or such higher period not exceeding ten years as may be decided by the National Financial Reporting Authority.