National Financial Reporting Authority (NFRA), an independent regulator for the auditing profession, establishment has been approved by the Union Cabinet chaired by the Prime Minister Narendra Modi on March 1, 2018. This is one of the key changes brought in the Companies Act, 2013, on the specific recommendations in 21st report of the Standing Committee on Finance. NFRA will oversee the functioning of the Institute of Chartered Accountants of India (ICAI) and ensure credibility in financial reporting. The decision is expected to result in improved foreign/domestic investments, enhancement of economic growth, supporting the globalisation of business by meeting international practices, and assist in further development of audit profession.
The setting up of the NFRA has been delayed beyond time and it is being established on account of the need felt across various jurisdictions in the world, in the wake of accounting scams, to establish independent regulators, independent from those it regulates, for enforcement of auditing standards and ensuring the quality of audits to strengthen the independence of audit firms, quality of audits and, therefore, enhance investor and public confidence in financial disclosures of companies.
The Companies Act casts a responsibility on auditors to see that corporate accounts are in order, but as in the case of latest scam involving Punjab National Bank, the Audit Committee consisting of Chartered Accountants did not fulfil its responsibility to tally entries made in the Swift (Society for Worldwide Interbank Financial Telecommunications) software with those made in the CBS (Core Banking Solution), whereas, the ICAI Guidelines specifically require auditors to check such records independently.
Earlier scams include Harshad Mehta, Enron, Ketan Parikh, and Satyam, which proved that all was not well with the way audits were being conducted. The Joint Parliamentary Committee indicted chartered accountants for their role in the stock market scam of 1992.
The Companies Act allows auditors to report to the Centre if they believe an offence involving fraud is being committed by the company, by its officers or employees. Auditors can choose not to sign the accounts if their concerns are not addressed by the management.
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