Audit regulator National Financial Reporting Authority (NFRA) on Thursday called for consolidation of all penal provisions (spread across various authorities) relating to financial reporting and suggested that they be vested with this Authority for effective implementation of the law.

This would allow for an integrated regulation of all the participants in the financial reporting system, Rangachari Sridharan, Chairperson, NFRA said at a CII conference on “Financial Reporting and Governance Framework”.

This NFRA stance is significant as currently, it only has powers to penalise the auditors for the misconduct and no authority to deal with functionaries of the companies responsible for financial reporting.

Sridharan highlighted that Section 132 of the Companies Act 2013 empowers NFRA to take action against auditors for professional misconduct. However, for other functionaries of the company responsible for financial reporting are concerned, the penal powers continue to be vested with the central government, he said.

Sridharan noted that NFRA currently had no mandate to deal with even matters such as unexpected delays in filing of periodical returns with the Authority.

“To enhance the effectiveness of the implementation of the law, it is necessary to consolidate all the penal provisions relating to financial reporting and to vest them under NFRA. This will allow for integrated regulation of all the participants in the financial reporting system”, Sridharan said.

The latest demand for consolidation of all penal provisions and bringing them under its fold is also in sync with NFRA's recent submission to give it a larger role and position it as the regulator of the entire gamut of financial reporting covering all processes and participants in the financial reporting chain.

Sridharan on Thursday reiterated that NFRA needs to be positioned as the regulator of the entire gamut of financial reporting.

Risk-based approach

Sridharan also said that NFRA proposes adopting a risk-based approach for selecting companies for audit quality review (AQR) by the Authority. He highlighted that NFRA thus far has been dictated by the cases that led to major financial scams recently in deciding on the companies that would be picked up for AQR.

“This intent to go in for risk based approach has been outlined in NFRA’s conclusion on recent consultation,” he said.

The factors that will be considered will be grouped into two categories — external impact factors and risk of material misstatement or wrong factors. “ External impact factors will cover all metrics that seek to understand, identify and measure the financial impact that the company has on the economy and environment. Wrong factors will identify metrics that will potentially predict the wrong that can predictably escape the attention of auditors or be overlooked by auditors,” he said.

The selection criteria of companies and audits for inspection will also include random methods of selection so as to ensure that appropriate responses are possible to emerging situations, he added.

“NFRA is conscious of the need for transparency in the approach to inspection, however NFRA has also to consider any unintended consequences that could follow upon complete and detailed disclosure of the risk based methodology in terms of the potential element of loss of surprise. This could prove detrimental to the effective functioning of discharge of NFRA’s duties. Therefore NFRA will only disclose the high level principles of its approach,” he said.

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