To,

The Hon’ble Minister,

Ministry of Corporate Affairs,

A – Wing, Shastri Bhawan,

Rajendra Prasad Road,

New Delhi – 110001

For the kind attention of Smt. Nirmala Sitaraman

Respected Madam,

(Sub: Representation on the proposal for removal of statutory audit for a certain class of Company)

We wish to draw your kind attention to the recently published new item on various forums that the ministry is considering a proposal to do away with the requirement of annual statutory audit as specified U/s 134 of the Companies Act, 2013 for a certain class of Companies. It has been widely published that the ministry is considering to remove the requirement of statutory audit for the small companies. In light of these news articles, we wish to humbly submit that any such proposal will be detrimental to the interests of various stake holders and shall cause a lot of compliance issues. We take this opportunity to apprise the ministry regarding the challenges which shall be there after implementation of any such proposal.

The various stakeholders like Banks, Shareholders, Investors, Income tax department, Goods and Services Tax Department, ESI and PF authorities will face significant challenges in their analysis of balance sheets after the implementation of any such proposal.

The Statutory auditors ensure the compliance of various laws and regulations and the consistency in the application of accounting policies is ensured during the audit. The auditors act as eyes and ears of the various regulatory authorities and any proposal to remove such statutory audit shall be prejudicial to the interests of these regulatory authorities.

The Statutory audit is a value addition in terms of financial reporting and it should not be viewed as a compliance burden. Any proposal to remove such requirement will present the stakeholders with a host of challenges. Following are the challenges which my be faced by various stakeholders :

1.       Non – Compliance with various accounting standards : The unscrupulous elements in the Industry shall use this opportunity to not comply with the mandatory accounting standards like AS-15 (Employee Benefits), AS-16 (Borrowing Costs) etc as these standards post a direct impact of various financial indicators and ratios of the Companies which is used by Banks to assess the repayment capacity of the Borrowers.

2.       Creation of many small companies to avoid the requirement of audit : The unscrupulous promoters shall resort to the creation of many small companies (shell entities and shadow entities) and any removal of requirement of statutory audit has the potential to be widely misused by  the unscrupulous elements of the Society. Any such removal of requirement of statutory audit will badly impact the sectors like Real estate, mining, trading and various other sectors and there will no supervision or lack of supervision over the unscrupulous elements of the business.

3.       Compliance with Income Tax Provisions : The audit ensures that the provisions of The Income Tax Act, 1961 are duly complied with and correct tax liability is ensured by various allowances and disallowances during the audit procedure. Identification of prior period expenses and personal expenses which are not allowed to businesses is done in statutory audit and it results in the increase in the revenue of Govt. Statutory audit of all the companies acts as a first check mechanism. The government is promoting a self compliance regime in income tax as the selection of cases for scrutiny or limited scrutiny has been reduced with an intent to reduce litigation with the Department. Now, if the statutory audit requirement will also be removed, then the financial statements of the Companies will remain unchecked and the check and balance mechanism which was instilled through the statutory audit will be removed. Further, the revenue augmentation of the Govt. will have to be done through a larger number of cases for scrutiny which will be prone to litigation and is not a cost effective mechanism in any manner. Also, the Govt. will need additional infrastructure to augment tax revenue by increasing number of cases for scrutiny.  As the requirement of Tax Audit U/s 44AB of the Income Tax Act, 1961 has already been enhanced, any such removal of requirement of statutory audit shall be detrimental to the interests of the revenue and the Govt.

4.       Compliance with GST Provisions : The audit ensures that the provisions of the various GST laws which is still in the nascent stages in our country. The chartered accountants have been flag bearers of the Govt. in the implementation of GST and the countrywide implementation of GST would not have been possible without active and agile participation of the Chartered Accountants. The statutory audit enables the chartered accountants to understand the business of the Client and only by understanding the business and its intricacies, the full effect of tax provisions, whether income tax or GST, cannot be given. Particularly in case of GST, wherein the taxation is on supply and various other technical and complex issues like Intermediary, reverse charge, blocked credit and reversal of ITC etc. are checked during the audit and compliance with the law is ensured. As the requirement of  GSTR – 9C has already been done away with for most of the Companies, any such removal of requirement of statutory audit shall be detrimental to the interests of the revenue and the Govt. 

5.       Impact on Banks as Lending Institutions : The removal of requirement of statutory audit put the already struggling banking sector in a precarious situation. Banks are major source of funds for the smaller companies which generally depend on bank finance to meet their working capital requirements and to expand their business. Duly audited financials are relied upon by the Banks to provide any kind of loan facility to its borrowers. Most of the borrowers are small and medium enterprises. The removal of requirement of statutory audit will pose a significant challenge to banking sector as they will not be in a position to rely on the Financial Statements which are presented to them. The analysis of balance sheet in order to assess the repayment capacity of the borrowers will become very difficult as the balance sheets will be unverified. Banks will have to put in place additional resources or conduct an audit before the grant of facility for assessing the repayment capacity of the borrower. The disclosures about financial statements are enabling tools for banks and financial institutions. There is a potent threat that most of the disclosures will not be made by the Corporates when the check and balance mechanism is withdrawn and requirement of statutory audit is done away with. There are many other challenges coupled with the doing away with the statutory audit.

6.       Compliance with Labor Laws : An statutory audit ensures the compliance with various labor laws and the same is evident in terms of reporting the facts about deduction and payments in the tax audit reports and the subsequent disallowance while assessing the tax liability. These are enabling provisions and a social welfare measure. Statutory audit ensures the compliance with various provisions and regulations of labor laws.

7.       Various users of financial statements : There are various other users of audited balance sheets like govt. authorities, PSUs  and organizations for deciding the Govt. assistance and setting up growth priorities and finding out new growth engines for the economy. Statutory audit becomes imperative in a large country like India wherein there are diverse groups with their own interests.

8.       Ensuring consistency in Financial Statements : India is a large and diverse country wherein people operate in an unorganized manner according to their culture and traditions. Even nature of accounts changes from place to place. Statutory audit ensures a consistency in financial statements across India.

Any removal of requirement of statutory audit will be onerous to the Govt. authorities and it may result in various authorities conducting their own audits in order to ensure the compliance of their respective laws. The separate audits by many Govt. agencies will increase the compliance burden on the smaller companies. It is pertinent to mention that almost 80% of the Companies are small and medium companies in India and any such removal entails huge costs and is coupled with the potential blatant misuse of these provisions.

Further, it is imperative for us to mention that Chartered Accountants community has always risen to the challenges in terms of radical transformation of the business which is being undertaken by the Govt. and has led from the front on all the occasions whether it was implementation of GST or whether the implementation of the new income tax portal. The suggestions of chartered accountants has been well received by the Govt. also. We, as a community, are the enablers of businesses and act as eyes and ears of various authorities.

The statutory audit, over the years, has proved its utility and has been a significant value addition tool which has stood the test of time and policy too. Our mother Institute, The Institute of Chartered Accountants of India, has been very proactive in addressing the needs of all the stake holders and significant changes have been made in the disclosure requirements in a very dynamic way. All these changes have only increased the transparency and have increased the reliability of the financial statements. The relevant increase in disclosures has added value to the various stake holders in the financial ecosystem.

It is requested that any such proposal to remove the requirement shall not be entertained by the Ministry and instead a more dynamic mechanism of audits should be put in place to protect the interests of all the stakeholders including the Govt.

We shall be thankful to you for the kind consideration of this representation.

Yours Faithfully,