COMPANY LAW Issues & suggestions in Consultation paper issued by the NFRA

Issues & suggestions in Consultation paper issued by the NFRA

Issues & suggestions in Consultation paper issued by the NFRA

Issues & suggestions in Consultation paper issued by the NFRA

In Paragraph 1.2 of the Consultation paper dated 29.09.2021, it has been said that

“As per view of significant role played by Corporates in India in Economic development & growth of the India, it is required that the regulatory environment of Indian economic is conducive to help & support but not have burden, economic activities & basic growth in business of these entities.

The regulations relating to financial reporting and auditing should not impose undue burdens and cost on the regulated entities, and the overall regulatory framework should be proportional to the size and type of the entities that are subject to such regulations.”

In Our opinion, Auditing is a financial Investment, not to be taken as cost as it has enduring benefit to the Government, Society at large, banks, Creditors, Investors etc.

  • Further in Paragraph 1.3 of the Consultation paper it has been mentioned that “In order to understand issues related to compliance with the regulatory framework specifically by smaller size companies.
  • NFRA has done a preliminary analysis on the key financial parameters of the Companies registered in India which have made MCA-21 filings.
  • The focus of the analysis is companies with NET WORTH BELOW RS.250 CRORES.”

However, when we look at the definition of SMCs as defined in The Companies (Accounting Standards) Rules, 2021 as a company-

  1. Whose debt securities or equity are not listed or are not in the process of listing on any recognized stock exchange ,either in India or outside India;
  2. Which is not a bank, an insurance company or financial institution;
  3. Whose TURNOVER does not exceed INR 250 Cr in the immediately preceding accounting year;
  4. Which does not have Borrowings (including public deposits) in excess of Rs.50 Crores at any time during the immediately preceding accounting year;
  5. Which is not holding or subsidiary company of a company which is not a small and medium sized company.

It can be seen from above that the NFRA has itself contradicted its consultation paper as in Para 1.3 it has been mentioned that the Focus of the analysis is on MSMCs companies with Net worth below Rs. 250 Crore, whereas it has been specifically defined in the definition of SMC, TURNOVER AND BORROWING are to be seen for the purpose of Determination of category of the Company.

Deterring the Corporates deviating from Transactional discipline

  • In the absence of statutory Audit Requirement & any Auditing Standards, there will be no check on the transactions of the Company and the promoters will at a liberty to mange business as per their own understanding fancy & will without doing statutory compliances along with audit requirements specified under different laws for time being in force.
  • Statutory Audit is very effective tool to ensure corporate Governance. Statutory Auditor particularly in the case of Small companies apart from its Audit responsibilities also acts as a mentor and guide to the clients in governance and regulatory matters.
  • For small and medium companies, the Statutory Auditor is the affordable handhold advisor to consult to for proactive compliance and to avoid noncompliance hassles.

India cannot and Should not be compared With global market

  • If we see the NFRA consultation Paper, NFRA has given comparison of Audit mandates across the globe.
  • NFRA has referred to Global jurisdictions stating that the auditing ecosystem of developed economies such as European Union, United Kingdom, Singapore ,Australia, USA and Japan allows for exemptions to certain classes of companies depending upon thresholds based on various parameters.
  • Your kind attention is drawn to the fact that data of all countries which have been given is of developed economies unlike India which it is still on the Stage of Development.
  • India just cannot and should not be compared with Global market when it comes to compliance.
  • NFRA should have checked for India’s position on Global Corruption Index, Compliance Risk Index, ESG Index and other vital indexes before Comparing.

Suggestions in Consultation paper issued by the NFRA

Some other Points which Chairman and Other members of NFRA must note and should take back this consultation paper and do some homework before coming up with such baseless recommendation:

  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.  NFRA and MCA do not want to extend any relaxation to MSMCs in filing Annual Forms like AOC-4, MGT-7, and DIR-3, but they are more concerned about fees being paid to Auditors. Why can’t NFRA suggest that only a single Annual Return be filed by small companies and completely do away with Penalties for filing these Forms? If that is done, we are sure that compliances will rise to a level of above 80%.
  3.  How will NFRA stop corporates deviating from transactional discipline and who will report to the Authorities concerned in case of any non-compliance on the part of the Corporates. Moreover, if NFRA & MCA are very concerned about compliance burden then decrees late filing fees for certain company based on threshold.
  4.  NFRA is also not concerned about the Audit being conducted by MAFs(Multi-National Accounting Firms) of several entities which were involved in frauds, where the Public and Govt. have suffered huge losses. So far, we have not heard of any major action against them. But it is really concerned about Local Firms doing Audits at a low fee, and the only panacea to this problem is to completely do away with such Audits, which are almost 95% of these entities.
  5. 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.
  6. How will proper tax compliance will be ensured in case of such companies?
  7. What’s the basis of comparing Developed Countries across the globe with India where there is no comparison on account of Compliances?
  8. Consultation paper is vague, NFRA must clarify what is actually their concern. Whether it is high fee, compliance burden, low fee or the Quality of Fee.
  9. Doing away with Micro and small companies which are in large Majority will not only reduce the work of audit firms but also in turn will increase employee lay off rate substantially
  10. If NFRA is so concerned than in our suggestion Minimum scale of fee to be implemented for all types of Audit and Assurance Services in Private as well as Public Sector.
  11. Impose restrictions on overcharging of Fees by MAFs.
  12. We also suggest the MCA Should implement Single Form Annual Filing and completely do away with Penalties for the delay in filing of various other Forms for the sake of ease of doing business.
  13. MAFs are openly flouting laws and entering into domains not allowed by the CA Act (Clause 2, 3, and 4 of Part I, First Sch). Take appropriate action under section 147 of the Co. Act for contravening section 139 of the Co. Act.
  14. For addressing the issue of exemption from Audit under Companies Act up to a threshold limit, please do a proper comparative study with GDP and Per-capita Incomes of the respective countries.
  15. Before issuing any consultation paper, kindly consult with of part-time members of NFRA, who are ICAI representatives.

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