Statutory audit requirement should be eased for small businesses but only those entities that do not matter should go out of the audit net when a threshold for exemption is set, audit experts and industry representatives said responding to a regulatory proposal.
Audit watchdog National Financial Reporting Authority (NFRA) last week published an analysis showing that most of the over 600,000 active companies that have filed annual financial statements for FY19 have net worth—gap between assets and liabilities—below ₹250 crore and a large section of them paid paltry sums to auditors for their audits to have any quality.
NFRA sought industry views on whether a relaxation on statutory audit requirement was needed and what should be the threshold. The regulator also pointed out audit exemptions given in other markets such as the EU, UK, Singapore and the US based on criteria such as balance sheet total, turnover and number of employees.
Experts said that in the ideal scenario where businesses use public funds in the right manner, financial statements show a true and fair picture of the affairs of the company and due taxes are paid, the reliance on statutory audit may be less. But in a market where compliance level is not very much up to the scratch and small firms access public funds, there obviously is a need for an independent auditor to vouch for the quality of their financial statements. However, in the case of small companies with no borrowings and where tax implications are insignificant, then probably statutory audit may not be required for such entities.
Pradeep Multani, president of PHD Chamber of Commerce and Industry, which has a large membership of micro-, small- and medium-enterprises, said the overall regulatory framework should be proportional to the size of the entities that are subject to the regulations. Multani recommended a different threshold for audit exemption, given that businesses, whether big or small, have to establish their credentials before banks, investors, rating agencies, suppliers, and tax authorities. This, he said, can be done only through reliable financial statements that are audited and certified.
“I would suggest that the requirement of statutory audit should be made optional for smaller companies, particularly micro- and small-enterprises with turnover up to ₹50 crore as per the definition under the MSME Development Act instead of fixing the exemption threshold limit of net worth of ₹250 crore suggested in the NFRA consultation paper. This will help the smaller companies and at the same time, not dilute the regulatory oversight on large corporates,” said Multani.
India is the only large economy and unique among the big economies in mandating compulsory statutory audit for all companies, irrespective of their size. Multani said this position needs to be reviewed.
MSMEs, too, benefit from statutory audits but a cost-benefit analysis of this regulatory obligation is needed, said Ashok Haldia, an expert in financial reporting and former managing director of PTC India Financial Services Ltd, (PFS), an infrastructure lender.
MSME are also entities in public interest as they are funded by banks and financial institutions and have financial interface with external stakeholders such as creditors, investors and government, particularly revenue authorities, he said.
“However, cost and effort involved in audit of MSMEs should be commensurate with the benefit from that. This would mean simpler tools and technique for audit and exemption for those where lax liability or external borrowing is relatively insignificant,” said Haldia.
There is a need to reduce compliance requirement and hence measures such as modifying the audit requirement for MSMEs to once in three years should be looked at, said Shravan Shetty, managing director, Primus Partners Pvt. Ltd, a consulting firm.
NFRA’s effort is to ensure that the regulatory environment is conducive to support, and not burden the growth in business and economic activities, the regulator said in its consultation paper.
An email seeking comments sent on Sunday to the ministry of corporate affairs and Ashok Kumar Gupta, chairperson of Competition Commission of India holding additional charge of NFRA remained unanswered at the time of publishing.
