NFRA needs to have standalone legislation: Chairperson Sridharan

National Financial Reporting Authority (NFRA) Chairperson R Sridharan on Thursday pitched for having a ''standalone legislation'' for the regulator in the interest of autonomy and emphasised that all the necessary penal provisions relating to financial reporting should be consolidated and vested with it.

Sridharan also said that exempting small companies from the mandatory audit would result in furthering the ease of doing business for MSMEs and reducing the compliance burden and costs on such enterprises.

The regulator was constituted under Sub Section (1) of Section 132 of the Companies Act, 2013, in October 2018.

Providing a detailed perspective and the way forward for the nearly three-year old regulator, Sridharan said that going forward, the NFRA proposes to adopt a risk-based approach for selection of companies based on external impact factors and Risk of Material Misstatement (RoMM) factors.

According to him, the NFRA can take action against auditors for professional misconduct but when it comes to other functionaries of a company who have the responsibility for financial reporting, penal powers continue to be vested with the central government.

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

While noting that the NFRA operates under a single section of the Companies Act, he said the section does not provide comprehensive coverage of all the functions and powers that are required to constitute the NFRA as a ''corporate financial reporting regulator''.

Further, he noted that the statute treats the NFRA as a subordinate office of the corporate affairs ministry.

''... in the interest of functional, financial and administrative autonomy of the NFRA, there is a compelling need for a standalone legislation.

''This will be the key to build up the regulatory capacity of the NFRA,'' he said.

The Technical Advisory Committee (TAC) of the NFRA has been entrusted with the task of developing a draft law, he added.

He was speaking at a conference on 'Financial Reporting & Governance Framework' organised by industry body CII along with the National Foundation for Corporate Governance (NFCG).

Sridharan said that the NFRA rules provide for monitoring entire financial reporting chain and its objectives will be meaningfully achieved through adherence to prescribed rules.

He wondered whether uniform accounting and auditing standards are the way to go and even whether compulsory audit of general purpose financial statements is desirable.

There are MSMEs that are essentially family-owned enterprises formed as companies for the sake of limited liability or to get bank loans, bus route permits, mining licences and the like. They are glorified proprietorships or partnerships. There is no public interest involved in foisting external audit on them, he noted.

''In any event, it is clear that such audit being carried out cannot boast of any quality at all. Banks can direct them to have audits as a condition for giving them loans but that would be a private matter. Exempting small companies from the mandatory audit would result in furthering the ease of doing business for MSMEs and reducing the compliance burden and costs on such enterprises,'' he said.

Earlier this week, the NFRA said it would set up a single stakeholders' advisory group as well as a research cell to support the group while on-site inspection is not a priority at this stage.