Because it doesn’t matter must be out of the audit net: Experts

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NEW DELHI : The statutory 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 said. 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 600,000 active companies that filed annual financial statements for fiscal year 19 have net worth – the 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 pointed out that audit exemptions granted in other markets such as the EU, UK, Singapore and US are based on balance sheet total, turnover and 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. However, in a market where the level of compliance is inadequate and where small businesses access public funds, it is necessary that an independent auditor can vouch for the quality of their financial statements. However, in the case of small businesses without borrowing and where the tax implications are insignificant, the statutory audit may not be required.

Pradeep Multani, president of the PHD Chamber of Commerce and Industry, which has a large number of micro, small and medium enterprises (MSMEs), 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 financial institutions. tax authorities. This, he said, can only be done through reliable, audited and certified financial statements.

“I would suggest that the requirement for statutory audit be made optional for small businesses, especially micro and small businesses with (a) turnover (of) up to ??50 crore as defined in the MSME Development Act, instead of setting the threshold for exemption from 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 the regulatory oversight of large businesses, ”Multani said.

India is unique among large economies in imposing mandatory legal audits on all businesses, regardless of size, Multani said. This position must be reviewed, he said.

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, 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.

“However, the cost and effort involved in auditing MSMEs should be commensurate with the resulting benefits. This would mean a simpler tool and technique for auditing and exemption for those where lax liability or external borrowing is relatively insignificant, ”said Haldia.

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