Ease of Doing Business for MSMEs: NFRA said that the regulations relating to financial reporting and auditing 'should not impose undue burden and cost on the regulated entities' and that the overall regulatory framework should be 'proportional to the size and type of the entities' that are subject to such regulations.
Ease of Doing Business for MSMEs: Independent audit regulator National Financial Reporting Authority (NFRA) has sought comments from stakeholders and public at large on whether micro, small and medium enterprises (MSMEs), depending upon some criteria and threshold, should be exempted from the mandatory statutory audit under Companies Act, 2013. The comments were sought through a consultation paper on Wednesday. NFRA noted that the regulations relating to financial reporting and auditing ‘should not impose undue burden and cost on the regulated entities’ and that the overall regulatory framework should be ‘proportional to the size and type of the entities’ that are subject to such regulations. NFRA was set up by the central government in October 2018.
NFRA, which makes recommendations to the government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or their auditors, had recently carried out a preliminary analysis on the key financial parameters of companies. The analysis was to understand issues related to compliance with the regulatory framework specifically by MSMEs having net worth below Rs 250 crores.
However, the views on whether the exemption should be provided to MSMEs are divided. “It would be a fantastic idea if the exemption is given. Statutory audit is required these days for only bank loan purposes. But bank statement that gives all expenditure and other details and GST returns through which one can get all sale and purchase details of a company, the information from the audit, hence, isn’t of much significance. Banks are finding alternative ways apart from the audited balance sheet to assess the creditworthiness of the client,” Jyoti Prakash Gadia, Managing Director, Resurgent India told Financial Express Online.
In contrast, a top executive at one of the leading consulting firms in the country requesting anonymity said the exemption, if given, might hit the credibility of information provided by MSMEs.
“This should not be done because there is a lot of reliance and dependency on the data. In a private company or a small company, for anyone who wants to place reliance on accounting information, the only credible source is financial statements audited by a statutory auditor. If this is done away then what will be the credible source available for let’s say investors who want to invest or a government authority etc., to understand the business,” the executive told Financial Express Online.
MSMEs too echoed the thought against providing exemption even as it would help reduce compliance burden if it is done away with. DP Goel who runs Conquerent Control Systems, which manufactures and supplies electric control panels, control panel board, and photoelectric control panel, said that while he pays Rs 4.5 lakh for the statutory audit, but it is not an unnecessary expense and a burden on his business.
“While it will help reduce the cost and compliance but it should not be removed. The audit ensures that the business has provided the correct and honest representation of its financial position. In the absence of it, who will certify the information provided? In such a case, one would be able to put anything he/she wants,” Goel told Financial Express Online.
NFRA in its consultation paper also asked whether there is a requirement for a separate set of auditing standards for MSMEs as it exists for accounting standards. It also noted that based on the analysis, the fees paid to auditors by a large majority of MSMEs are “way below what an audit, when performed in compliance with the letter and spirit of the standards of auditing, would require.” This implied that small businesses haven’t been paying the amount required for a quality audit.
“There is definitely a trust deficit in the audited balance sheet of MSMEs. So why not just remove the audit practice. The deficit is because the audit quality is bad as the fee paid by MSMEs is not good enough. For a good quality audit, the cost is at least Rs 5 lakh but many MSMEs don’t want to spend that much amount except a few,” added Gadia.
Even with respect to getting a separate auditing system for MSMEs, it would be important to see how it would meet every stakeholder’s requirement. “Getting in place a new method would be a maddening exercise because you would have to take into consideration the requirement of every stakeholder associated with a business. For instance, a bank’s requirement would be different from an investor’s requirement. Likewise, tax authorities would have separate requirements, etc., unlike in statutory audit that is a cohesive report,” the executive added. The last date for emailing comments is November 10, 2021.
Meanwhile, on Tuesday, according to an NFRA statement, the Institute of Chartered Accountants of India (ICAI) had submitted an approach Paper for revising existing Accounting Standards of companies that are not required to follow Indian Accounting Standards (ASs). The paper submitted to NFRA also proposed texts of 18 revised Accounting Standards (ASs) out of a total of 32 revised ASs that are expected to be prescribed upon completion of this AS revision project.
NFRA noted that most of the businesses to which this proposed revised ASs will apply are private entities while many of them are of “very small net worth or turnover or indebtedness or a combination of these. They would be mostly owned by small families, sometimes along with a small circle of friends and relatives. Therefore, public interest in the General Purpose Financial Statements (GPFSs) of these Companies would most likely be minimal,” the statement had said.