NFRA invites views till Nov 30 on abolishing statutory compliance for MSMEs

Opinion divided on whether exemption will benefit MSMEs

India’s independent audit regulator, the National Financial Reporting Authority (NFRA) is seeking public comments on its consultation paper ‘Statutory Audit and Auditing Standards for Micro, Small and Medium Companies’. With a goal of increasing ease of doing business, the NFRA is proposing to abolish statutory auditing for MSMEs under the Companies Act, 2013 depending on ‘some criteria and threshold’, say multiple media reports.   

The audit authority is evaluating if the compliance requirement is imposing an undue financial burden on MSMEs, and is clear that the weight of the regulatory framework should be ‘proportional to the size and type of entities that are subject to such regulations.’  

A recently issued public statement from NFRA said that the deadline for submitting online and offline comments has been extended to November 30.  

The three other issues the NFRA is asking for views on are: 

1. Is there a need for separate auditing standards for MSMEs, just like there exist separate accounting standards for the sector?

2. Do the stakeholders agree with NFRA’s approach to estimating the standard cost of audit?

3. Do the statutory exemptions under Companies’ Auditors Report Order, 2020 and Internal Controls over Financial Reporting need to be standardised?

Established in 2018 under the Companies Act, 2013, the main function of the NFRA is to make recommendations on accounting and auditing policies and standards that should be adopted by companies, a class of companies or their auditors, the website says. The independent watchdog also monitors and enforces compliance with said accounting and auditing standards, apart from ‘overseeing the quality of service’ undertaken by professionals who ensure compliance with such standards and suggesting measures for such improving services.   

The recommendations of the NFRA about statutory compliance for MSMEs are based on its preliminary study based on the financial reports (turnover, networth and indebtedness) of companies with a turnover of less than INR 250 Crores, to understand their limitations in complying with compulsory auditing. Based on data furnished by the Ministry of Corporate Affairs, NFRA concluded most of the 600,000 active companies in India were small businesses or one person-held companies, and that only 52% of these entities had filed their Annual Financial Statements and General Purpose Financial Statements.  

Further, the consultation paper pointed out the remuneration paid to the auditors by MSMEs who did file these financial reports was not enough to conduct an in depth audit that was acceptable as per the standards laid down by the NFRA. In that sense, the poor quality of audit would make the entire exercise futile, the body feels. The regulator noted that other big economies like the EU, UK, US and Singapore have exempted small companies from statutory auditing, based on their turnover, balance sheet and number of employees.  

Stakeholders of the MSME industry are divided on what a move like abolishing statutory compliance would mean for small businesses in India. On the one hand, like a representative from a corporate financial advisory firm pointed out in and interview with The Financial Express, statutory audit is needed only for bank purposes, and as the financial health of the small business can be assessed from bank statement and GST returns, doing away with this additional compliance layer would be a welcome move. Banks are also exploring alternate ways to evaluate the creditworthiness of potential and existing clients, he added.    

Not all concur with this view. For instance, an executive at another consulting firm told The Financial Express that small companies rely on the audit report furnished by an independent auditor to establish their credibility to investors, government authorities and potential clients. Agreeing with this view, an MSME owner also said that while doing away with the statutory compliance would reduce cost of compliance, it was a necessary expense to provide a “correct and honest representation” of the business.   

A report in Mint quoted experts saying that in case of small firms where there are no borrowings and ‘tax implications are insignificant’, no audit is required.   

The details about where the comments can be filed can be found here.