NFRA — National Financial Reporting Authority Explained

This document covers

1. Background
2. Why is NFRA Required Now?
3. Who are covered by NFRA?
4. Functions of NFRA
5. Duties of NFRA
6. Powers of NFRA
7. Composition of NFRA
8. Recent Developments in NFRA

1. Background

• NFRA means National Financial Reporting Authority.
• It was constituted on 01st October 2018 by Government of India u/s 132(1) Companies Act 2013.
• Corporate frauds involving Satyam, Yes Bank, DHFL, and the Nirav Modi group undermined investor confidence and revealed deficiencies in audit accountability. These developments played a crucial role in strengthening and activating NFRA’s oversight framework.

2. Why is NFRA Required Now?

The need for NFRA has become increasingly important in today’s complex and highly regulated corporate environment.

• Rising Corporate Complexity
• Lessons from Major Corporate Failures like Satyam, Yes bank etc
• Shift from Self-Regulation to Independent Oversight
• Protection of Investors and Public Interest
• Alignment with Global Best Practices
• Strengthening Audit Quality and Accountability

NFRA is required to ensure transparency, improve audit quality, enhance investor confidence, and reinforce corporate governance in India’s evolving financial ecosystem.

3. Who are covered by NFRA?

The following entities fall under NFRA’s regulatory oversight

• Listed companies either on Indian stock exchange or outside India
• Unlisted public companies meeting any of the following thresholds as on 31st March of the immediately preceding financial year
  • Paid-up capital of ₹500 crore or more
  • Annual turnover of ₹1,000 crore or more
  • Aggregate outstanding loans, debentures, and deposits of ₹500 crore or more
• Insurance companies
• Banking Companies
• Companies engaged in the generation or supply of electricity
• Companies governed by any special act
• Any company, body corporate, or person (or class thereof) referred to NFRA by the Central Government in public interest.
• A body corporate incorporated or registered outside India that is a subsidiary or associate of an Indian company covered above, if its income or net worth exceeds 20% of the consolidated income or consolidated net worth of the Indian parent.

4. Functions of NFRA

• Recommending Authority: NFRA can recommend the formulation and laying down of accounting, auditing policies and standards for adoption by companies or auditors.
• Monitoring and Enforcing Authority: NFRA can monitor and enforce the compliance with accounting and auditing standards
• Review of Quality: NFRA conducts inspections and quality reviews of audit firms, evaluates audit methodologies and documentation, and recommends improvements to enhance professional standards.
• Incidental and Ancillary Functions: NFRA Perform such other functions as may be necessary or incidental to the aforesaid functions.

5. Duties of NFRA

• Protection of Public Interest NFRA has a duty to safeguard public interest and the interests of investors, creditors and others associated with the companies or bodies corporate by ensuring credibility and reliability in financial reporting and audit practices.
• Upholding Accounting and Auditing Standards: It is responsible for promoting and maintaining high standards of accounting and auditing in accordance with statutory requirements.
• Ensuring Auditor Accountability: NFRA must ensure that auditors of public interest entities perform their duties with independence, integrity, and professional competence.
• Maintaining Transparency in Financial Reporting: NFRA is obligated to support transparency and consistency in financial disclosures to improve the overall governance framework in India.

6. Powers of NFRA

• Power to Investigate Misconduct: NFRA can investigate professional or other misconduct by Chartered Accountants or audit firms, either on its own or upon reference from the Central Government. Once NFRA starts an investigation, no other authority can continue or initiate proceedings on the same matter.
• Powers equivalent to Civil court: During investigations, NFRA has powers similar to a civil court. It can require production of books and documents, summon and examine individuals under oath, inspect records, and issue commissions for examination of witnesses or documents.
• Power to impose penalty: Where professional or other misconduct is proved, NFRA may impose:
  • On Individuals: Minimum ₹1 lakh, extendable up to five times the fees received
  • On Firms: Minimum ₹5 lakh, extendable up to ten times the fees received
• Power to Debar Auditors or Firms: NFRA may debar a member or firm from
  • Being appointed as an auditor or internal auditor
  • Undertaking audit of financial statements
  • Performing valuation under Section 247

  The period of debarment may range from a minimum of six months up to ten years.

   NOTE

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Any person aggravated by an NFRA order may file an appeal before the Appellate Tribunal in the prescribed manner.

7. Composition of NFRA

The National Financial Reporting Authority consists of

• 1 Chairperson with expertise in accountancy, auditing, finance, or law.
• 3 full-time members with expertise in accounting, auditing, law and finance. (* as per current structure of NFRA)
• 9 part-time members who does not have any financial or other interest which may affect his functions as a part-time member prejudicially (* as per current structure of NFRA)

8. Recent Developments in NFRA

In recent years, NFRA has significantly strengthened its enforcement framework, reflecting a clear shift toward stricter audit oversight and enhanced accountability of auditors in India.

1. Increased Enforcement Actions
2. Higher Monetary Penalties
3. Focus on Audit Quality Deficiencies
4. Personal Accountability of Engagement Partners
5. Greater Regulatory Coordination

NFRA has transitioned from a statutory framework to a fully operational enforcement authority. Its actions demonstrate a firm commitment to elevating audit standards and reinforcing trust in India’s corporate reporting ecosystem.

As per recent news, NFRA getting more independent power also means less self-regulation by ICAI, since ICAI previously handled disciplinary functions for its members. Learn more at MCA plans to simplify Companies & LLP Acts