Reply To NFRA On Consultation Paper On Statutory Audit And Auditing Standard For Msmc

You have recently issued a consultation paper on statutory Audit and Auditing standard for MSM Companies. You have framed 4 questions for the comments of stakeholders including Chartered Accountants:

You had issued the consultation paper for relaxation of compulsory audit to MSMC on the following grounds:

1. Payment to the Auditor as audit fee is very low compared to estimated standard cost of audit for a reasonably good audit quality.

2. Ease of auditing requirement in Tax Law

3. Exemption of statutory audit requirement to SMC in developed countries.

While going through the whole consultation paper, It is felt that most of your observation hinges upon incorrect interpretation and twisting of inappropriate data as if you want to prove that accounting professional handling MSMC audits are not competent enough. Before going to the incorrect data interpretation. Let me share as few inappropriate comments made in the consultation paper.

Statutory audit is shown on the conceptual photo

Page No: 11: Low percentage of compliance in filing of AFS and MGT 7 indicates perhaps a lack of adequate accounting professional with many of these companies. It is of common knowledge that most of such work is entrusted with companies’ secretary than how the accounting profession come in to picture and how a derogatory remark can be passed by such an authority.

Page No 12: Around 30.26% of companies (1,81,392) that have reported NIL payments to Auditors. This perhaps due to data input error indicating Lack of adequate accounting professional with many of these companies.  How the accepted data entry error can be blame game for accounting professionals in a situation where most of such work is done by CS. Does your good office is not aware of such facts.

Page no 17: The above analysis clearly brings out mismatch between the current payment made to auditors as reported by the companies and the estimated cost of conducting an audit in compliance with the letter and true spirit of SAs. The inference that is inescapable is that such audit as being carried out perhaps only a SHAM. Such a highly derogatory comment libelled as SHAM just on the basis of low audit fee shows the intension of the NFRA and everyone should condemn such a heinous act and dubious mind-set.

Total No of Companies: As per consultation paper, Total no of active companies as on 31.03.2018 is 11.59 Lacs. Though these data are taken from MCA but seems that data need correction at the end of MCA also as only 8,41,942/- companies had filed their return of Income for AY 2018-19 as per CBDT Data and it is well known fact that company who is doing any activity would file Income tax return.

Further out of total 7,239/- listed companies, Only 4349 companies had filed MGT-7. It means that only 60% of listed companies had filed their MGT-7  In a general parlance listed companies are considered as  big companies and controlled by various regulators still they have failed to comply in a large chunk. Does  it failure of accounting profession or failure of Government supervisory bodies ?

Payment to Auditors: Out of total 11.59 Lac companies, 3,84,184 companies are having PIAD UP CAPITAL up to 1 Lacs whereas 1,74,246 companies are having paid up capital in the range of 1-5 Lacs. NFRA itself had admitted that around 2.66 Lacs companies had reported NIL turnover means these  companies are not having any business operation than how hefty audit fee can be charged from these companies. Who is going to pay for audit fee. Is there any law which mandate that stipulated audit fee is required to be charged from these companies. Suppose Auditors would have charged handsome audit fee in such a case than it would have interpreted by you that Accounting professionals are charging heavy amount of fee compared to work done in such a small audit hence NFRA is of the opinion that such entities can be kept out of audit purview to minimise their cost and ease of doing business. Now the Phrase ease of doing business become a buss word or a whistle which can be blown at any moment of time for own benefit. Really such an act can increase the ease of doing business is highly questionable. Whether NFRA take the guarantee that after abolition of statutory audit, These companies would comply all the regulations promptly and they will not face the music of various departments for non updating of accounts.

If NFRA think that Auditors should charge their calculated standard fee than first of all they should recommend Government to prescribe audit fee in line with estimated standard audit fee in Government companies,.

Total Indebtness of Companies: As per consultation paper,   there are total 3,15,803 companies whose ineptness is below 25 Crore. If one take average loan outstanding 5 Crore than total exposure comes around 15.75 Lac Crore, if it is taken 10 crore average than total exposure comes to around 31.50 Lacs Crore  and so on. As per consultation paper, Total exposure is 37,57,859 lac Crore and this amount comes to around 55% of total indebtness  of total corporate sector. Audit put a check on such companies and save the public fund to a large extent. To get away statutory audit requirement of these companies would jeopardise the interest of public fund to a great extent as total banking exposure was 103 Lacs Crore by all SCB as on 31.3.2020. Bifurcation of bank credit exposure is a sunder:

Nature of Exposure Amount in Crore
Public Sector 18,01,360
Co Operative Sector 85,754
Private Corporate Sector 31,32,210
Total 50,19,324
Household Sectors- Individual 43,65,307
Household Sectors- Others   9,94,155
Total 53,59,462
Grand Total 1,03,78,789

TABLE NO. 2.4 – TYPE OF ACCOUNT AND ORGNISATION-WISE CLASSIFICATION OF OUTSTANDING CREDIT OF SCHEDULED COMMERCIAL BANKS MARCH – 2020

Total Banking Exposure in India as on 31.03.2020 (Rs in Crore) Sources: https://dbie.rbi.org.in/DBIE/dbie.rbi?site=publications#!19

TYPE OF ACCOUNT
PUBLIC SECTOR
CO-OPERATIVE SECTOR
PRIVATE CORPORATE SECTOR
No. of
Accounts
Credit
Limit
Amount
Outs-tanding
No. of
Accounts
Credit
Limit
Amount
Out-standing
No. of
Accounts
Credit
Limit
Amount
Out-standing
1
2
3
4
5
6
7
8
9
Cash Credit
30090
605256
307320
29323
44022
29738
118939
698898
500845
Overdraft
14388
117975
61961
9998
15828
6045
102350
375404
198006
Demand Loans
119985
301083
268651
7905
16389
13098
68506
589334
393834
Medium Term Loans
15662
313346
195042
38550
13908
11346
196858
597876
422716
Long Term Loans
49728
1330231
913760
88897
38498
25287
388073
1895826
1318989
Packing Credit
2523
44253
9882
14
209
146
35667
262650
108316
Inland and Foreign Bills Pur/Disc
6567
144164
44744
206
234
94
346785
582936
189504
TOTAL
238943
2856308
1801360
174893
129086
85754
1257178
5002924
3132210

___

TYPE OF ACCOUNT
HOUSHOLD SECTOR – INDIVIDUALS
HOUSEHOLD SECTOR – OTHERS
No. of
Accounts
Credit
Limit
Amount
Outstanding
No. of
Accounts
Credit
Limit
Amount
Outstanding
10
11
12
13
14
15
Cash Credit
9063236
235546
197656
1758947
497390
393121
Overdraft
6446297
255719
175548
962721
287675
204882
Demand Loans
136468465
1582237
1025290
274714
33806
24777
Medium Term Loans
45318663
575509
404653
12602939
143392
90324
Long Term Loans
47662316
3397279
2558538
2886760
357487
243421
Packing Credit
1325
1567
975
28548
50768
21590
Inland and Foreign Bills Pur/Disc
190532
5535
2646
34766
68477
16040
TOTAL
245150834
6053391
4365307
18549395
1438995
994155

___

See Notes on Tables.
(Amount in ` Crore)

Considering the overall situation, instead of do away with statutory audit requirement, NFRA should think about the changes of procedure of appointment of auditors and audit of certain threshold turnover, net worth etc should be appointed by your office directly, NFRA should also prescribe mandatory audit fee for each classes of companies for ease of doing business because removing audit will ultimately destruct the whole chain of system and business will be ruined. NFRA should continue the audit requirement with certain suggested measures for EASE OF DOING BUSINESS.

My comments on specific questions are as under:

S No Particulars Comments
1 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? No, See above observation for my answaer
2 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? No, Present AS are sufficient to cover all the requirements
3 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? No, Accounting Professional also undertakes other works in his office accordingly absorption of total cost on audit should be around 50-60% only
4 Do you think the current exemption thresholds for CARO, ICFR and statutory audit applicability need to be standardised and made uniform? If no, why not and if yes, what would be the criteria and thresholds? Yes, All the requirement can be taken on same footing.

CA MUKESH KABRA, SURAT    Mobile No 09825107236

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One Comment

  1. Aryan Gupta says:

    How can accounting data error blamed on CS.. That is surely due to accounting professionals (who may be CA or not) or due to lack of adequate data checking process in the Company.

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