NFRA seeks stakeholders’ comments on the removal of statutory audit for Medium and Small Cos.

“Given the critical role that businesses play in India’s economic growth and development, the regulatory framework must support, rather than hinders, the expansion of these organizations’ business and economic operations. Financial reporting and auditing rules should not place unnecessary burdens or costs on regulated organizations, and the entire regulatory framework should be appropriate to the size and kind of enterprises subject to such regulations.” NFRA

1. Introduction

National Financial Reporting Authority (NFRA) has issued a consultation paper on Statutory Audit and Auditing Standards for Micro, Small, and Medium Companies (MSMCs). NFRA has sought public comments on as to whether Micro, Medium, and Small Companies be exempted from statutory audits based on threshold criteria. The last date for receipt of the comments is 10 November 2021.

2. Background

In October 2018, India’s National Financial Reporting Authority (NFRA) was established as an independent accounting and auditing regulator. The NFRA Charter declares that it is committed to Objectivity, Integrity, Impartiality, Independence, Fairness, and Transparency. The Companies Act, 2013 section 132(2)(a) mandates NFRA to provide recommendations to the Central Government on the development and laying down of accounting and auditing rules and standards for adoption by companies or classes of companies, or their auditors.

3. Requirement of Statutory Audit under the Companies Act, 2013

Section 139(1) prescribes that every Company shall appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting. The manner and procedure for selection of auditors by the members shall be as prescribed and the matter relating to such appointment for ratification by members at every annual general meeting.

Section 143(3) casts some additional reporting requirements on the auditor. One such requirement is that the auditor report shall state whether the company has adequate internal controls over financial reporting (ICFR) with reference to financial statements in place and the operating effectiveness of such controls.

4. NFRA’s Findings from MCA 21 Data

On conducting the preliminary analysis on the key financial parameters of the companies registered in India from their MCA-21 filings, the NFRA found that the fees paid to auditors by a large majority of Micro, Small and Medium Companies (MSMCs)are way below what an audit, when performed in compliance with the letter and spirit of the Standards of Auditing, would require

NFRA further found that out of the total number of companies only 52.48% (6,03,055 Companies) of the total number of active companies have filed their Annual Financial Statements and MGT -7 for the financial year (FY) 2018-1910 as of June 2021. NFRA viewed that such a low percentage of compliance with a critical statutory filing even after two years from the end of the reporting period indicates perhaps a lack of adequate accounting professionals with many of these companies.

It may also be relevant to note that there are only 4,349 Listed Companies that have filed their AFSs & MGT-7 so far.

5. Auditing Threshold in the Indian Tax Laws

NFRA viewed that Indian Tax Authorities have substantially done away with the requirement of an audit by Chartered Accountants up to certain threshold amounts. By the Finance Act, 2021, an Income Tax audit has been dispensed with for businesses with a turnover of up to Rs 10 crores, provided not more than 5 % of the total transactions are in cash. GST Audit has also been completely done away with. In view of the above, the extent of public interest involved in the financial reporting of these companies is most likely to be minimal.

6. The question placed by the National Financial Reporting Authority in front of the professional (s) for their review through consultation paper?

Question No. 1 – Do you think that Micro, Small, and Medium Companies (MSMCs) depending upon some criteria and threshold should be exempted from the mandatory statutory audit under the Companies Act, 2013? If not, why not, and if yes, what would be the criteria and thresholds for exemption?

Question No. 2 – Do you think there is a requirement for a separate set of auditing standards for MSMEs as it exists for accounting standards? If no, why not, and if yes, what should be the basis for the same?

Question No. 3 – The cost of conducting an audit as per the prescribed standards is an important input for the responses to Questions 1 and 2. Do you agree with the approach for estimating the standard cost of audit computed by NFRA? If not, which areas/ assumptions need changes?

Question No. 4 – Do you think the current exemption thresholds for CARO, ICFR, and statutory audit applicability need to be standardized and made uniform? If no, why not, and if yes, what would be the criteria and thresholds?

As a result, NFRA is seeking feedback on the four particular questions raised in the Consultation Paper. The deadline for submitting comments is November 10, 2021.

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