NFRA proposes to exempt compulsory statutory audit for MSMEs

MSMEs may not be required to conduct the compulsory statutory audit anymore if the new proposal by NFRA gets accepted. This can prove to be good news for small and medium-sized companies looking for ease of doing business. Currently, all companies, big or small are required to conduct a compulsory audit as per Indian laws.

Independent regulator and audit watchdog NFRA (National Financial Reporting Authority), has floated a consultation paper seeking comments and suggestions from the stakeholders and the public on whether MSMEs should be exempted from the mandatory statutory audit that all companies currently comply with, according to law.

NFRA had earlier carried out an analysis to understand the issues related to compliance faced by MSMEs with a net worth below 250 Crore INR. In the consultation paper, NFRA has also invited comments on whether a separate set of auditing standards are required for MSMEs as it exists for accounting standards.

What is NFRA?

• The National Financial Reporting Authority or NFRA was set up in 2018 under Section 132(1) of the Companies Act, 2013. It is an independent regulator which oversees auditing and accounting standards in India. 
• Under Section 132(2)(a) of the Act, the NFRA makes recommendations to the Government on the formulation of accounting and auditing standards and policies for adoption by companies in India.
• NFRA also undertakes investigations and imposes sanctions against defaulters like audit firms and auditors such as barring from practice or monetary penalties.

What is the proposal about?

NFRA had floated a paper that sought public and stakeholder comments on whether MSMEs (Micro Small and Medium Enterprises) should come under the ambit of the compulsory statutory audit or not.

The audit watchdog had noted that the financial reporting and auditing regulations ‘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 had also expressed concerns that the required fees for a quality audit were not being paid to the auditors, thus resulting in substandard audits.

The proposal mainly consists of the following questions as given below:

1. Whether Micro, Small and Medium Companies (MSMCs) depending upon some criteria and threshold should be exempted from the mandatory statutory audit under Companies Act, 2013? If not, why not, and if yes, what would be the criteria and thresholds for exemption?
2. Is there a need for a separate set of auditing standards for MSMCs as it exists for accounting standards? If no, why not, and if yes, what should be the basis for the same?
3. Regarding the cost of conducting an audit as per the prescribed standards which is an important input for the responses to Questions 1 and 2. Whether the stakeholders agree with the approach for estimating the standard cost of audit computed by NFRA? If not, which areas/ assumptions need changes?
4. Whether 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?

The Repercussions

However, it remains to be seen whether the industry experts and other stakeholders agree on the exemption provided to MSMEs under the mandatory statutory audit even as it would help ease the compliance burden. Some industry gurus believe that audits are not necessary as all information of transactions is recorded in bank statements and GST returns. 

Experts are also of the opinion that the exemption limit should be based on a company’s turnover instead of net worth so that the exemption would help smaller companies and not weaken the regulatory oversight of bigger ones.

Many businessmen do not find the fees under the audit too high or a burden and are worried that the removal of such audits might cast doubts on their business’ representation and certification in the eyes of banks, investors, and rating agencies.

The credibility of businesses is indeed one subject that might come under scrutiny if the mandatory audit is done away with as the data through the audit serves as a certificate of reliability of accounting information.

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