Ease of Doing Business for MSMEs: Independent audit regulator National Financial Reporting Authority (NFRA) has sought comments from stakeholders and public at significant on no matter whether micro, smaller and medium enterprises (MSMEs), based upon some criteria and threshold, must be exempted from the mandatory statutory audit below Companies Act, 2013. The comments had been sought via a consultation paper on Wednesday. NFRA noted that the regulations relating to economic reporting and auditing ‘should not impose undue burden and cost on the regulated entities’ and that the all round regulatory framework must be ‘proportional to the size and type of the entities’ that are topic to such regulations. NFRA was set up by the central government in October 2018.
NFRA, which tends to make suggestions to the government on the formulation and laying down of accounting and auditing policies and requirements for adoption by organizations or their auditors, had lately carried out a preliminary evaluation on the essential economic parameters of organizations. The evaluation was to fully grasp troubles associated to compliance with the regulatory framework especially by MSMEs possessing net worth under Rs 250 crores.
However, the views on no matter whether the exemption must be supplied 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 TheSpuzz Online.
In contrast, a top rated executive at one of the top consulting firms in the nation requesting anonymity stated the exemption, if provided, could hit the credibility of facts supplied 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 TheSpuzz Online.
MSMEs also echoed the believed against offering exemption even as it would assist cut down compliance burden if it is completed away with. DP Goel who runs Conquerent Control Systems, which manufactures and supplies electric manage panels, manage panel board, and photoelectric manage panel, stated that even though he pays Rs 4.5 lakh for the statutory audit, but it is not an unnecessary expense and a burden on his company.
“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 TheSpuzz Online.
Subscribe to TheSpuzz SME newsletter now: Your weekly dose of news, views, and updates from the world of micro, smaller, and medium enterprises
NFRA in its consultation paper also asked no matter whether there is a requirement for a separate set of auditing requirements for MSMEs as it exists for accounting requirements. It also noted that based on the evaluation, the costs paid to auditors by a significant 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 smaller firms haven’t been paying the quantity expected for a high-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 finding a separate auditing method for MSMEs, it would be essential to see how it would meet every single 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 strategy Paper for revising current Accounting Standards of organizations that are not expected to comply with 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 anticipated to be prescribed upon completion of this AS revision project.
NFRA noted that most of the firms to which this proposed revised ASs will apply are private entities even though quite a few 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 stated.