National Financial Reporting Authority
7th-8th Floor, Hindustan Times House, 18-20,
Kasturba Gandhi Marg, New Delhi 110001

Dear Sir


NFRA has issued a Consultation Paper on 29th September 2021 on Statutory Audit and Auditing Standards for Micro, Small and Medium Companies (MSMCs) for comments by its stakeholders.

I am sharing my views on this consultation paper which I have also submitted with NFRA on the email provided ( [email protected]) in the consultation paper.

NFRA was constituted under section 132 of the Companies Act 2013 and powers are as under

a) make recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or class of companies or their auditors, as the case may be

b) monitor and enforce the compliance with accounting standards and auditing standards in such manner as may be prescribed

c) oversee the quality of service of the professions associated with ensuring compliance with such standards, and suggest measures required for improvement in quality of service

In respect to Notifying Accounting Standards and Auditing Standards following is the Procedure

STEP 1: ICAI recommends

STEP 2: NFRA Checks and Recommend to CG for Notifying it

In nutshell NFRA is responsible for recommending accounting and auditing policies and standards in the country, undertaking investigations, and imposing sanctions against defaulting auditors and audit firms in the form of monetary penalties and debarment from practice

The Institute of Chartered Accountants of India (ICAI) had initially voiced its discontent with the idea of a regulator for the sector, saying the existing structure was adequate but the government has clarified that the role of the new regulator and those of ICAI will not overlap.

But overlapping is apparent with NFRA March 2021 report of Technical Advisory Report (TAC) and aspiration of NFRA to be a regulator for entire gamut of financial reporting forming part of conclusion of the report. Now the latest consultation paper also shows that there is clear overlapping of power and NFRA wants to usurp powers of the Institute of Chartered Accountants of India

The Institute of Chartered Accountants of India (ICAI) is a statutory body established by an Act of Parliament, viz. The Chartered Accountants Act, 1949 (Act No.XXXVIII of 1949) for regulating the profession of Chartered Accountancy and following areas comes under ambit of ICAI

A) Regulating Profession of Accountancy

B) Formulation of Accounting Standards

C) Prescribing Standards of Auditing

D) Maintaining Quality through Peer Review

E) Financial Reporting Review

The affairs of the ICAI are managed by a Council in accordance with the provisions of the Chartered Accountants Act, 1949 and the Chartered Accountants Regulations, 1988. The Council constitutes of 40 members of whom 32 are elected by the Chartered Accountants and remaining 8 are nominated by the Central Government generally representing the Comptroller and Auditor General of India, Securities and Exchange Board of India, Ministry of Corporate Affairs, Ministry of Finance and other stakeholders.

So clearly this shows how NFRA is interfering in matters which comes under the ambit of ICAI

Now coming to Consultation paper and the Questions being asked by NFRA for comments by Stakeholders. NFRA has done an analysis of MCA data and focus of the analysis is companies with Net worth below Rs. 250 crores. These companies are referred to as Micro, Small and Medium companies (MSMCs) for the purpose of this Consultation Paper.


QUESTION 1 BY NFRA: Do you think that 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?


REASON FOR VIEW: By the Finance Act, 2021, Income Tax audit has been dispensed with for businesses with turnover of up to Rs 10 crores, provided not more than 5 % of the total transactions are in cash. GST Audit has also been completely done away with. Now if Statutory Audit is also exempted then there will be no checks on the business transactions and such exemption will lead to emergence of spurious companies within MSMCs segment indulging into unbridled sham business. Also, sir I would like to Question that how Govt Catch such transactions and businesses without any deterrent and accountability

Further as per Companies (Accounting Standards) Rules, 2021 “Small and Medium Sized Company” (SMC) are already eligible for certain exemptions from accounting standards.

Further if the Audit is abolished than what according to NFRA would be basis for lenders to decide the credit worthiness of the business as Audit report is one of the most important bases to decide that business is not SHAM. Non-performing assets (NPAs) or bad loans of banks have declined by Rs 61,180 crore to Rs 8.34 lakh crore at the end of March 31, 2021. Don’t you think that Audits are also a reason for this sharp decline???

Further, Had the small Companies really worried for audit fees or compliance burden, they could have converted themselves into partnership or proprietorship firm. A non-conversion as aforementioned itself indicates that compliance cost for audit is not the real spirit for non-conversion

QUESTION 2 BY NFRA – Do you think there is a requirement 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?


REASON FOR VIEW: Let me reiterate one thing that as per Sec 132 of the Companies Act, 2013, the Role of NFRA is that of Consulting Agency and Recommendation of Auditing Standards comes within the Ambit of ICAI. Let ICAI do what comes under their ambit. The aim of both ICAI and NFRA is to work for common public good and not work as competing entities.

There exists no requirement for separate set of auditing standards as auditing standards are the principles that auditor’s follow while reviewing company’s financial records and principles can never be compromised or curtailed. Let us not forget that in accounting standards also there is minimal exemptions for SMCs and not separate standards. So, Question is VOID AB INITIO.

QUESTION 3 BY NFRA The cost of conducting an audit as per the prescribed standards is an important input for the responses to Questions 1 and 2. Do you agree with the approach for estimating standard cost of audit computed by NFRA? If not, which areas/ assumptions need changes?


REASON FOR VIEW: As per Table present on page 39 of the Consultation paper report take into consideration the complete cost structure of a practicing CA firm for which calculation is also given in the paper itself. From table it would be seen that the estimated cost of audit is taken as high as Rs.4.57 lacs even for a company with nil turnover and this is in sharp contrast of the fee which is being charged at present.

So basically, what NFRA wants to convey is that since fee charged by auditors is less than Cost so Audit should be abolished. What kind of baseless conclusion is that?? Also, another criteria for this conclusion is the % Indebtedness. So, if a company is Debt free so that Company can’t commit financial fraud. Is that so??

According to my understanding there is a need to revisit this Consultation Paper by NFRA and should be taken back.

QUESTION 4 BY NFRA: Do you think 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?


REASON FOR VIEW: CARO is additional reporting mechanism and bringing the Audit threshold limit in line with CARO would again mean that abolishing Audit for most of the companies which can have seriously implications as already mentioned in point 1.

Some Points which Chairman and Other members of NFRA must note:

1) Company is a creation by Statute with limited liability and any error in the financial statement may bring in significant risk to the users or third parties.

2) How will you plug Revenue leakages in case all Audits are completely abolished. Also, if MCA and NFRA are really concerned about the compliance burden then reduce Late filing fees for certain companies based on threshold

3) Ease of doing business is welcome step but same can be done by making law simple and making good infrastructure (certainly not like the present Income tax portal) instead of doing away with compulsory Audit

4) Since 1949 people see audited financial statements with trust, so what are NFRA plans to educate people with less educational background when they are provided a set of unaudited financial statements

5) Also, NFRA must clarify what is actually their concern. Whether it is high fee, compliance burden, low fee or the Quality of Fee. Consultation paper is very confusing and must be revisited and any such documents shouldn’t be made available for public without Board’s approval

I strongly believe much more study is required before reaching to any conclusion. Hope that the Authority will possibly have a relook at the paper presented for comment.

The views presented are purely personal in nature and I request you to bring to my notice any error which may have crept in due to limited research.


Chartered Accountant neither in Practice nor Contesting ICAI Elections

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  1. Reghunath P says:

    Instead of abolishing the compulsory Audit.. abolish the so called NFRA.. unqualified govt officials having no knowledge regarding financial matters making decisions… patheticccc……..

  2. CA Jitender Kakkar says:

    Dear CA Rohit, I fully endorse the views taken up in your write up. NFRA is not going to take any responsibility if any fraud, mismanagement is discovered with MSME company or otherwise a small company. Rather small companies are more prone to sham activities as compared to larger ones

  3. Suresh says:

    your article is 100% right sir, is NFRA can give guarantee to Banks, suppliers, employees, lenders etc., on financial viability of this small complies. if no statutory audit this companies can play what every they want.

  4. lakshminathan says:

    Sir,I belong to a business entity.My experiance is -the Govt auditors audit accounts from fictitious angle they bring in far fetched ideas to find fault always.whereas non Govt auditors,make a transparent account,as a obscure one.And an obscure account is made simple and straight.Both kinds are above laws and rules.They think none is above them to check and control.what NFRA is doing is Welcome.This is the opinion of an ordinary citizen of India.

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October 2021