NFRA plans to redraft audit norms for small firms

The National Financial Reporting Authority (NFRA) plans to carry out fresh analysis of its proposal of exempting small firms from mandatory statutory audit and may float a revised draft report on it, said two people privy to the discussion.

To avoid the conflict, the authority to start a fresh round of discussion with the Institute of Chartered Accountant (ICAI) on the contentious issues of the proposal, they say.

“We are looking at modifying the net worth criteria and will deliberate whether it could be done on a basis of a company’s turnover instead of net worth so that it could benefit smaller firms without doing away the regulatory oversight of big firms, ” an official privy to the plan told ET.

Set up by the Centre in October 2018, audit regulator NFRA has sought public comments on its draft proposal floated on October 10, on whether MSMES, depending upon some criteria and threshold, be exempted from the mandatory statutory audit under the Companies Act.

The proposal, however, did not augur well with the ICAI. They were of the view that the proposal is not within NFRA purview they will not decide whether an audit of a particular class of companies is required or not.

An email sent to ICAI remained unanswered. Sources at the governing body said that they have yet to receive any communication from NFRA on the matter.

Audit watchdog in its draft paper floated had suggested that those firms having a net worth below Rs 250 crore to be kept out from audit purview. “Threshold of net worth is one of the contentious issues, which NFRA wants to decide in consultation with ICAI, ” the official said.

According to him, NFRA has to be run in a manner ensuring harmony between all stakeholders including ICAI. There can’t be conflict on roles and mandates all the time. Both the institutions have been given mandates from the government which needs to be followed, he said.

He further said that the objective of the proposal is not just to help in reducingthe compliance burden but to achieve the goal of ease of doing business. All necessary details such as banks and GST returns are being captured. Even the tax audit exempt businesses having turnover of Rs 10 crore or below, he explained.

But those who are closely associated with the CA profession believe that doing away with the mandatory audit requirement would affect the governance standards. “The key purpose of the audit is to have an effective governance system in companies. Even small firms require auditing as it makes them compliant with all regulations.

Audited firms get several benefits in terms of credit and other facilities. It enables the maker checker concept wherein small businesses don’t understand the various compliances, said Atul Gupta, immediate past president, ICAI. He added that audits even assure proper guidance on penalties and even prosecution as laid down in various laws, in case of non- compliance.