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Business Laws and Ethics · Internal Financial Control for Financial Reporting

Constitution of National Financial Reporting Authority (Section 132)

Updated 10 October 2026 · Fact-checked

The National Financial Reporting Authority (NFRA) is a body the Central Government may constitute under section 132 of the Companies Act, 2013. It recommends accounting and auditing standards, monitors compliance, oversees audit quality, and can investigate and penalise chartered accountants and firms for professional or other misconduct.

Understand Constitution of National Financial Reporting Authority

Companies prepare financial statements and auditors report on them. Someone must set the standards and check that both sides follow them. Section 132 provides for this through the National Financial Reporting Authority (NFRA).

The Central Government may, by notification, constitute the NFRA. Its purpose is to deal with matters relating to accounting and auditing standards under the Act. Its head office is at New Delhi, and it may meet at other places in India. It performs its functions through divisions as prescribed.

The NFRA has a chairperson and other members, not exceeding fifteen, who may be part-time or full-time. The chairperson is a person of eminence with expertise in accountancy, auditing, finance or law, appointed by the Central Government. Members must declare no conflict of interest or lack of independence. Full-time chairperson and members must not be associated with any audit firm (including related consultancy firms) during their appointment and for two years after it ends.

Its work falls into two groups. Under sub-section (2) it makes recommendations on standards, monitors and enforces compliance, and oversees the quality of service of the professions. Under sub-section (4) it investigates misconduct, has civil court powers, and can order penalties and debarment.

NFRA differs from ICAI. Under section 133, the Central Government prescribes accounting standards as recommended by ICAI, in consultation with and after examination of the NFRA's recommendations. So ICAI recommends, NFRA examines and recommends to the Government, and the Government prescribes.

Key rules to remember

Constitution (s.132(1))
Central Government may, by notification, constitute NFRA
The word is 'may', not 'shall'. Functions run through prescribed divisions (s.132(1A)).
Composition (s.132(3))
Chairperson + other members not exceeding 15 (part-time and full-time)
Chairperson: person of eminence with expertise in accountancy, auditing, finance or law, appointed by the Central Government.
Cooling-off for full-time persons
No association with any audit firm during appointment + 2 years after
Applies to chairperson and members in full-time employment with NFRA.
Core functions (s.132(2))
(a) recommend standards; (b) monitor and enforce compliance; (c) oversee quality of service of professions; (d) other prescribed functions
Clause (a) is recommendation only. The Government prescribes standards.
Penalty on proof of misconduct (s.132(4)(c)(A))
Individuals: not less than ₹1,00,000, up to 5 times the fees received. Firms: not less than ₹5,00,000, up to 10 times the fees received
The firm minimum was substituted from ten lakh rupees by the 2018 amendment, as the footnote shows.
Debarment (s.132(4)(c)(B))
Minimum 6 months, up to 10 years
From auditor or internal auditor appointments, audits, or valuation under section 247.
Appeal (s.132(5))
Aggrieved person appeals to the Appellate Tribunal against a s.132(4)(c) order
As prescribed for manner and fee.
Accounts audit (s.132(14))
NFRA accounts audited by the Comptroller and Auditor-General of India
Annual report is laid before each House of Parliament (s.132(15)).

How to solve Constitution of National Financial Reporting Authority questions

Most questions ask you to explain NFRA's constitution, functions or powers, or to apply them to a case about auditor misconduct.

  1. 1Identify what is asked: constitution, composition, functions, powers, penalty, or NFRA versus ICAI.
  2. 2Start with the base rule: Central Government may constitute NFRA by notification under section 132(1).
  3. 3List the relevant limb: sub-section (2) for functions, (3) for composition, (4) for investigation powers and penalties.
  4. 4For a case, check who is involved: NFRA can act on members or firms of chartered accountants registered under the Chartered Accountants Act, 1949.
  5. 5Check whether misconduct is proved before applying penalty or debarment, and state the amounts and period.
  6. 6Mention the appeal route to the Appellate Tribunal and the bar on other bodies continuing proceedings once NFRA starts an investigation.
  7. 7Close with a one-line conclusion that answers the question directly.

Quickest way: F-C-P-A memory chain

When to use it: For 5 to 8 mark theory answers and for MCQs on NFRA.

  1. F for Formation: Central Government, by notification, head office New Delhi.
  2. C for Composition: chairperson plus up to 15 other members.
  3. P for Powers: investigate, civil court powers, penalty, debarment.
  4. A for Appeal: Appellate Tribunal.
  5. Add the ICAI contrast: ICAI recommends standards, NFRA examines, Government prescribes under section 133.

Common mistakes in Constitution of National Financial Reporting Authority

  • Saying NFRA itself prescribes accounting standards.

    The name suggests it makes the standards.

    Fix: Write that NFRA makes recommendations to the Central Government. The Central Government prescribes them under section 133.

  • Writing that members total fifteen including the chairperson, or exactly fifteen.

    The limit is remembered loosely.

    Fix: The text says a chairperson and other members not exceeding fifteen.

  • Mixing up the penalty figures for individuals and firms.

    Both use a minimum plus a multiple of fees.

    Fix: Individuals: minimum ₹1,00,000, up to 5 times fees. Firms: minimum ₹5,00,000, up to 10 times fees.

  • Saying NFRA can investigate any person or any employee of a company.

    Overgeneralising the investigation power.

    Fix: The power is over professional or other misconduct by a member or firm of chartered accountants registered under the Chartered Accountants Act, 1949.

  • Forgetting the appeal and the bar on parallel proceedings.

    Students stop at penalty.

    Fix: Add that appeal lies to the Appellate Tribunal and that no other institute or body can start or continue proceedings once NFRA has begun an investigation.

  • Treating the debarment period as fixed.

    Only one number is remembered.

    Fix: State minimum six months and a maximum of ten years, as determined by NFRA.

Worked examples

Example 1

Explain the functions and powers of the National Financial Reporting Authority under section 132 of the Companies Act, 2013. (7 marks)

Show the solution
  1. Constitution: the Central Government may, by notification, constitute NFRA to deal with matters relating to accounting and auditing standards.
  2. Functions under section 132(2): (a) recommend accounting and auditing policies and standards to the Central Government for adoption by companies or their auditors; (b) monitor and enforce compliance with those standards; (c) oversee the quality of service of the professions and suggest improvements; (d) other prescribed functions.
  3. Investigation power under section 132(4)(a): suo motu or on a Central Government reference, into professional or other misconduct by a member or firm of chartered accountants.
  4. Civil court powers under section 132(4)(b): discovery and production of books and documents, summoning and examining persons on oath, inspection of books and registers, issuing commissions for examining witnesses or documents.
  5. Orders where misconduct is proved: penalty and debarment.
  6. Appeal lies to the Appellate Tribunal.

Answer: NFRA recommends standards, monitors and enforces compliance, oversees professional quality, investigates CA members and firms for misconduct with civil court powers, and can penalise and debar them, subject to appeal to the Appellate Tribunal.

Example 2

After an investigation, NFRA finds professional misconduct proved against an audit firm that received audit fees of ₹40,00,000. What is the range of penalty NFRA can impose, and what else can it order?

Show the solution
  1. The offender is a firm, so use the firm limits under section 132(4)(c)(A)(II).
  2. Minimum penalty: ₹5,00,000.
  3. Maximum penalty: 10 times fees received = 10 × ₹40,00,000 = ₹4,00,00,000.
  4. So the penalty ranges from ₹5,00,000 to ₹4,00,00,000.
  5. Additional order: debarment from being appointed as auditor or internal auditor, undertaking any audit, or performing valuation under section 247, for at least six months and up to ten years.
  6. The firm may appeal to the Appellate Tribunal.

Answer: Penalty between ₹5,00,000 and ₹4,00,00,000, plus possible debarment for six months to ten years, with a right of appeal to the Appellate Tribunal.

Exam tips

  • For MCQs, memorise the numbers: up to 15 other members, 2-year cooling-off, ₹1,00,000 and ₹5,00,000 minimums, 5 and 10 times fees, 6 months to 10 years.
  • In a difference question, use two columns in your mind: ICAI recommends standards to the Government, NFRA examines and recommends, Government prescribes under section 133.
  • Write the sub-section numbers (132(2), 132(4)) beside each function or power. It signals precision and earns step marks.
  • In case-based questions, first check that the person is a chartered accountant or CA firm and that misconduct is proved before stating the penalty.
  • Do not mention a power or number you are not sure of. Stick to the text of the section.

Practice questions from Internal Financial Control for Financial Reporting

Constitution of National Financial Reporting Authority in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Constitution of National Financial Reporting Authority: frequently asked questions

Is NFRA constituted compulsorily under section 132?

Section 132(1) says the Central Government may constitute NFRA by notification. The section uses 'may', so write it that way in your answer.

What is the difference between NFRA and ICAI in setting standards?

ICAI recommends accounting standards to the Central Government. Under section 133, the Government prescribes them in consultation with and after examination of NFRA's recommendations. NFRA itself recommends standards and monitors compliance under section 132.

Who can be the chairperson of NFRA?

A person of eminence with expertise in accountancy, auditing, finance or law, appointed by the Central Government. The chairperson and members must make a declaration on no conflict of interest or lack of independence.

Can NFRA investigate auditors for misconduct?

Yes. It can investigate, suo motu or on a Central Government reference, professional or other misconduct by a member or firm of chartered accountants. Once NFRA starts, no other institute or body can start or continue proceedings on that matter.

Where does an aggrieved person appeal against an NFRA penalty order?

Under section 132(5), the person may appeal to the Appellate Tribunal, in the manner and on payment of the fee prescribed.