The audit net needs to be relaxed, but only for companies that don’t matter: industry
NEW DELHI : Legal audit requirement should be relaxed for small businesses, but only entities that don’t matter should come out of the audit net when an exemption threshold is set, experts say in audit and industry representatives in response to a regulatory proposal.
The National Financial Reporting Authority (NFRA) audit oversight body released an analysis last week showing that most of the more than 600,000 active companies that have filed annual financial statements for fiscal year 19 have net worth (difference between assets and liabilities) below ??250 crore and a large part of them paid a pittance to auditors for their audits to be of good quality.
The NFRA has sought advice from industry on whether a relaxation of the statutory audit requirement is necessary and what the threshold should be. The regulator also highlighted audit exemptions granted in other markets such as the EU, UK, Singapore and US based on criteria such as balance sheet total, turnover and the number of employees.
Experts said that in the ideal scenario where companies use public funds in the right way, the financial statements show a true picture of the business of the company and the taxes owed are paid, the dependence on the legal audit may be less. But in a market where the level of compliance is not quite up to par and where small businesses access public funds, it is obviously necessary for an independent auditor to vouch for the quality of their financial statements. However, in the case of small businesses with no borrowing and where the tax implications are insignificant, it is likely that statutory audit will not be required for these entities.
Pradeep Multani, chairman of the PHD Chamber of Commerce and Industry, which has a large number of micro, small and medium enterprises, said the overall regulatory framework should be commensurate with the size of the entities subject to regulation. Multani recommended a different threshold for the audit exemption, given that companies, whether large or small, must establish their credentials in front of banks, investors, rating agencies, suppliers and tax authorities. This, he said, can only be done through reliable, audited and certified financial statements.
âI would suggest that the requirement for statutory audit be made optional for small businesses, especially micro and small businesses with a turnover of no more than ??50 crore according to the definition of the MSME Development Law instead of setting the exemption threshold limit of the net worth of ??250 crore suggested in the NFRA consultation document. This will help small businesses and at the same time, will not dilute regulatory oversight of large businesses, âMultani said.
India is the only major economy and unique among major economies to impose mandatory legal auditing on all businesses, regardless of size. Multani said this position needs to be reviewed.
MSMEs also benefit from legal audits, but a cost-benefit analysis of this regulatory requirement is needed, said Ashok Haldia, financial reporting expert and former managing director of PTC India Financial Services Ltd (PFS), an infrastructure lender. .
MSMEs are also public interest entities as they are funded by banks and financial institutions and have a financial interface with external stakeholders such as creditors, investors and government, especially tax authorities, a- he declared.
âHowever, the costs and efforts involved in auditing MSMEs should be commensurate with the resulting benefits. This would mean simpler tools and techniques for auditing and exemption for those where lax liability or external borrowing is relatively insignificant, âsaid Haldia.
There is a need to reduce the compliance requirement and therefore measures such as changing the audit requirement for MSMEs to once every three years should be considered, said Shravan Shetty, Managing Director of Primus Partners Pvt. Ltd, a consulting company.
The NFRA’s effort is to ensure that the regulatory environment is conducive to supporting and not hampering the growth of business and economic activities, the regulator said in its consultation paper.
An email seeking comment sent to the Ministry of Corporate Affairs and Ashok Kumar Gupta, chairman of India’s Competition Commission responsible for the NFRA on Sunday, went unanswered at the time of publication.
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