Those who don’t matter, should be out of purview of audit: Experts

Audit watchdog National Financial Reporting Authority (NFRA) published an analysis last week showing that most of the 600,000 active companies filing annual financial statements for FY19 have net worth – the difference between assets and liabilities. gap – down ₹250 crores and a large section of them paid a meager amount auditors For any quality for their audit.

NFRA sought the opinion of the industry whether relaxation in statutory audit requirement is required and what should be the limit. The regulator also pointed out that the audit exemptions granted in other markets such as EU, UK, Singapore and US are based on balance sheet total, turnover and number of employees.

Experts said that in the ideal scenario where businesses utilize public funds properly, financial statements show a true and fair picture of the firm’s affairs, and taxes are paid, reliance on statutory audits can be reduced. However, in a market where compliance levels are not up to scratch and smaller firms use public funds, an independent auditor is needed to verify the quality of their financial statements. However, in case of small firms with no borrowings and where the tax implications are insignificant, statutory audit may not be required.

Pradeep Multani, president of PHD Chamber of Commerce and Industry, which has a large membership of micro, small and medium enterprises (MSMEs), said the overall regulatory framework should be proportional to the size of the entities that are subject to the regulations. Multani recommended a different limit for audit exemption, noting that businesses big or small will have to establish their credentials before banks, investors, rating agencies, suppliers and tax authorities. This, he said, can only be done through credible financial statements that are audited and certified.

“I would suggest that the requirement of statutory audit for up to (a) turnover (k) of small companies, especially micro and small enterprises, should be made optional. ₹50 crore as defined under the MSME Development Act, instead of fixing the exemption limit limit of net worth ₹250 crore has been suggested in the NFRA consultation paper. This will help small companies and at the same time, will not dilute regulatory oversight on large corporates,” Multani said.

Multani said India is unique among large economies in making mandatory statutory audits mandatory for all firms, irrespective of their size. He said that the situation should be reviewed.

MSMEs also benefit from statutory audits, but this regulatory obligation needs a cost-benefit analysis, said Ashok Haldia, an expert in financial reporting and former managing director of infrastructure lender PTC India Financial Services Ltd.

MSMEs are also entities in the public interest as they are funded by banks and financial institutions and have a financial interface with external stakeholders such as creditors, investors and the government, especially revenue officials, he said.

“However, the cost and effort involved in auditing MSMEs should be commensurate with the benefits to be derived from it. This will mean a simpler tool and technique for audit and discounting for those where loose liabilities or external borrowings are relatively insignificant,” Haldia said.