NFRA floats consultation paper on statutory audit. National Financial Reporting Authority {NFRA} review the quality of the listed companies in India and unlisted companies. The companies with a net worth of greater than or equal to 500 crores, annual turnover of greater than or equal to the amount of 1000 crore, paid-up capital of greater than or equal to the amount of 500 crore and companies listed out of India comes under the broad category of unlisted companies. Central Government gave authority to NFRA from 1st October 2018. The corporate scams urged for forming this authority. This blog is about the Consultation paper – September 2021 on Statutory Audit that was under presentation to public comments.
Government schemes for the MSME sector:
The government of India has updated the definition of MSME with an understanding of turnover and investment. The threshold for audit from MSME units raised from one crore to five crores. NFRA mentioned that the net worth of assets and liabilities gap for more than 60,000 MSME companies stood at 250 crores. For SSI, 20 per cent of the turnover is the working capital. The agricultural sector and MSME sector falls under the priority sector in India. Banks give priority to lending to these industries. If there is stress in the MSME account, then banks identify the company with three levels. The first level is overdue of interest on the loan for more than 30 days, the second one is between 31 days to 60 days and the third one is between 61 to 90 days. As per the stress level, the MSME units are asked to undergo restructuring, rectification and recovery. MSME Samadhaan, Credit linked capital subsidy scheme, stand up India scheme, PMEGP, DAF-SDSM, covid-19 relief measure, GECL, CGTMSE, and PMMY are the different schemes of the government for the MSME units. Banks and finance companies create awareness through online portals and webinars regarding MSME schemes. MSMEs may soon get exemption from mandatory statutory audits. ICAI opposes NFRAs audit exemption as it is only a preventive check.
Ease of doing business for the MSME sector:
The property registration, contract enforcement and settlement of disputes involve long periods and high costs in India. The high-income economies have lesser costs and periods. To register the property’s value there is a need for waiting 58 days. And 1445 days for settling the dispute. For the efficient functioning of the MSME, sector government have set up a single-window system, digital presence, and protection of workers, ease of credit and ease in laws related to the labour force. Out of 63.3 million existing MSME units, only 5 million gets formal credit.
In the last four years, India has witnessed a growth of 79 per cent in the rankings. The World Bank reviews the ranking factors about the ease of doing business. If we compare the ease of doing business among the global companies, India wants to get the place of the top 100 companies in ease of doing business. The government created paperless and faceless incorporation for the MSME units to smoothen the process of incorporation. ESIC states that the insurance of employees is mandatory if the number of employees is more than ten. If the employee count increase to twenty numbers, then the firm need to get registration from the provident fund and EPFO. The study conducted by RBI states that sudden policy changes by the government are the reason for the NPA.
The four questions from NFRA regarding MSMC are as follows:
What is the amount of exemption that would be favorable to MSMC growth?
Is there a necessity to frame a separate set of accounting standards for MSMC?
Which area of auditing needs to be changed for conducting audits with a standard method with less cost?
Do you think the thresholds for ICFR, CARO and statutory audit requires standardization and uniformity?
Conclusion:
In foreign countries like Singapore, the US, the UK and European Union the exemption for MSMC is as per the balance sheet figures, number of employees and turnover. In small firms with insignificant statutory audits and no amount of borrowings, a statutory audit is not necessary. The audit fees paid by the MSMC is less and it leads to poor quality of audit reports. MSMC’s endures the accounting standards, and there is no need for auditing standards for these companies. The debate is essential to enhance the growth of the MSMC sector. If the audit is optional then it makes the business processes efficient. The statutory audit in India is unique when compared to other foreign companies. The cost management urges for the changes in the statutory audit of MSMC companies. Every chartered accountant and cost accountant need to think about the financial and environmental issues of the MSMC sector. So, they understand the questions of the regulatory body. The analysis of the consultation paper helps in understanding the values of auditing.