National Financial Reporting Authority (NFRA) - Section 132
# National Financial Reporting Authority (NFRA) - Section 132
## 1. Constitution
Central Government (CG) may constitute NFRA.
Notified date: 01.10.2018.
## 2. Functions and Duties of NFRA
(a) Make recommendations to CG for formulation of:
Accounting policies and standards
Auditing policies and standards
(collectively referred to as AAS)
(b) Monitor and enforce compliance with such AAS.
(c) Oversee the quality of service of professionals associated with compliance, and suggest measures for improvement.
(d) Perform such other functions as may be prescribed.
## 3. Composition of NFRA
1 Chairperson (appointed by CG)
Full-time members
Part-time members
Maximum 15 members in total
### Declaration Required
Chairperson and members shall give a declaration to CG that:
There is no conflict of interest, AND
There is no lack of independence.
### Restriction on Audit
Full-time members shall not be associated with any audit firm (including related consultancy) during their appointment AND for 2 years after ceasing to hold office.
### Part-time Members shall include:
Joint Secretary (MCA)
Deputy CAG
Deputy Governor (RBI)
ED / CEO of SEBI
President of ICAI
Chairperson of Accounting Standards Board / Auditing Standards Board
Two experts (e.g., from ISB / IIM)
## 4. Power to Investigate
NFRA has power to investigate matters of professional or other misconduct:
Suo motu, OR
On reference made by the CG.
### Exclusivity
Where NFRA initiates investigation, no other institute (e.g., ICAI) shall initiate or continue any investigation in such matter.
### Powers of Civil Court
NFRA has the same powers as a civil court under CPC in respect of:
Discovery and production of books / documents
Summoning and enforcing attendance of persons
Examination on oath
Inspection of books / register of any company / firm
Issuing commission for examination of witness
## 5. Penalties (Where misconduct is proven)
NFRA may, after proceedings, impose the following:
Aspect
Individual
Firm
Minimum Fine
₹1 lakh
₹5 lakh
Maximum Fine
5x of the fees received
10x of the fees received
Debarment
6 months to 10 years (from being appointed as auditor / internal auditor / valuer) — at NFRA's discretion
### Appeal
Any person aggrieved by the order of NFRA may appeal to the National Company Law Appellate Tribunal (NCLAT).
## 6. Class of Companies Governed by NFRA (Rule 3 of NFRA Rules)
NFRA may investigate auditors of the following classes of companies and bodies corporate:
(a) Companies whose securities are listed on any stock exchange in India or outside India.
(b) Unlisted Public Companies (UPC) having on the 31st March of the immediately preceding FY:
(c) Insurance, banking, electricity companies, or companies governed by any special Act.
(d) Any body corporate or company / person on a reference made to NFRA by CG in public interest.
### Cessation of NFRA's Jurisdiction
If a company ceases to fall under the above limits for 3 consecutive years, NFRA shall stop governing such company.
Worked example
### Example 1
Example 1: PQR Ltd is an unlisted public company with PUSC of ₹600 crore as on 31.03.2025. Will NFRA have jurisdiction over its auditors for FY 2025-26?
Solution: Yes. PQR Ltd is an UPC with PUSC ≥ ₹500 crore as on 31.03 of the immediately preceding FY. Hence, NFRA shall have jurisdiction over its auditors.
### Example 2
Example 2: Mr. A, a Chartered Accountant in practice, is found guilty of professional misconduct by NFRA. The audit fees received by him from the client was ₹3 lakh. What is the maximum penalty?
Solution:
Minimum fine: ₹1 lakh
Maximum fine: 5 × ₹3 lakh = ₹15 lakh
Additional debarment: NFRA may debar Mr. A from being appointed as auditor / internal auditor / valuer for a period of 6 months to 10 years at its discretion.
### Example 3
Example 3: ICAI started an investigation against an auditor in February. In March, NFRA also initiated an investigation against the same auditor on the same matter. What happens?
Solution: Once NFRA initiates investigation, no other institute (including ICAI) shall continue or initiate any investigation in respect of such matter. ICAI must drop its proceedings on this matter.
⚠️ Common exam mistakes
Confusing the maximum number of members — NFRA has maximum 15 members in total (including Chairperson).
Mixing up the 2-year cooling-off period post-appointment — it applies only to full-time members regarding association with audit firms.
Forgetting that NFRA's jurisdiction over UPCs requires meeting PUSC ≥ ₹500 crore OR Turnover ≥ ₹1,000 crore OR Loans/Debentures/Deposits ≥ ₹500 crore — this is an OR condition, not AND.
Incorrect fine structure — students often confuse the multiplier: it is 5x for individuals and 10x for firms of the fees received (not the other way round).
Stating ICAI as the appellate authority — appeals against NFRA orders go to NCLAT, not ICAI or NCLT.
Forgetting that if a company ceases to meet limits for 3 consecutive years, NFRA's jurisdiction over it ends.
Treating NFRA's investigation power as concurrent with ICAI — it is exclusive once NFRA initiates.
Bare-Act text Section 132 · Companies Act, 2013 read with NFRA Rules, 2018 · 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 class of companies or their auditors, as the case may be;
(b) monitor and enforce the compliance with accounting standards and auditing standards in such manner as may be prescribed;
(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.
(3) The National Financial Reporting Authority shall consist of a chairperson, who shall be a person of eminence and having expertise in accountancy, auditing, finance or law to be appointed by the Central Government and such other members not exceeding fifteen consisting of part-time and full-time members as may be prescribed...
(4) Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall—
(a) have the power to investigate, either suo motu or on a reference made to it by the Central Government, for such class of bodies corporate or persons, in such manner as may be prescribed into the matters of professional or other misconduct committed by any member or firm of chartered accountants...
(b) have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908...
(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 determined by the National Financial Reporting Authority.
(5) Any person aggrieved by any order of the National Financial Reporting Authority issued under clause (c) of sub-section (4), may prefer an appeal before the Appellate Tribunal in such manner and on payment of such fee as may be prescribed.