The ministry of corporate affairs (MCA) is planning to bring out a set of new accounting and auditing standards tailor-made for limited liability partnerships (LLPs) that will seek more disclosures, a person aware of the matter said.
The move is aimed at improving the quality of the financial statements of LLPs, which is a preferred form of incorporation of business, especially in the services sector, and offers certain flexibilities and a simplified compliance regime compared to that of a company. Select accounting standards and auditing standards for LLPs would mean more disclosures and qualitative improvement in their financial statements.
There are two considerations about governing LLPs, said the person mentioned above on condition of anonymity. These involve improving ease of doing business on the one hand and scaling up the disclosure and transparency requirements on the other.
The government notifies accounting standards scripted by the Institute of Chartered Accountants of India (ICAI) for different entities from time to time. There are more than 230,000 active LLPs in the country and many businesses are being converted from company to LLP format, a legal form introduced in India in 2008. In December and January each, more than 16,000 companies were converted to the LLP format, data available with the ministry showed.
“The government has decriminalized the LLP Act with effect from 1 April to improve the ease of doing business. On the other hand, certain provisions applicable to companies, such as disclosure of the ultimate natural person behind the entity, are also being made applicable to LLPs from 1 April. There is also a plan to prescribe accounting and auditing standards for LLPs as part of the governance architecture of this legal form,” the person said.
The idea is that a soft touch regulatory framework meant to reduce the rigours of compliance will work better with heightened transparency in the affairs of the business.
An email sent to the ministry of corporate affairs on Friday morning seeking comments for the story remained unanswered till press time.
The rising popularity of the LLP form justifies making the accounting and auditing standards applicable for them, according to experts.
“The number of LLPs is growing steadily. Making accounting standards applicable to them will make the financial statements of different LLPs comparable. This is likely to be done in phases, applying select accounting standards to certain classes of large or systemically important entities,” said Ved Jain, former president of ICAI, the accounting rule maker.
The ministry last month notified the amendments introduced in the LLP (Amendment) Act of 2021. decriminalising procedural lapses and technical defaults, from next month.
The amendment sought to reduce penal provisions in the LLP Act from 24 to 22 and decriminalised 12 provisions. The ministry has also designated registrars of companies (RoCs) as adjudicating officers under the Act.