Representation addressing concerns & inputs reg. Consultation Papers issued by NFRA

Representation addressing concerns & inputs reg. Consultation Papers issued by NFRA

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CA. Sanjay Kumar Agarwal started this petition to The Secretary, National Financial Reporting Authority


The Secretary

National Financial Reporting Authority

7th-8th Floor, Hindustan Times House, 18-20

K G Marg, New Delhi 110001

Sub: Comments in respect of NFRA Consultation Paper – September 2021 on Statutory Audit and Auditing Standards for Micro, Small and Medium Companies (MSMCs)


This communication is by way of a written representation/letter with respect to the recent NFRA Consultation Paper issued in September 2021, addressing our concerns and inputs. Vide this representation, we hereby furnish our para-wise comments -

In para 4.3, NFRA requests views/comments of stakeholders on 4 specific questions which are given below:

Q1. 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?

Q2. 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?

Q3. 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?

Q4. 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?

1.       It is submitted, before we give our comments, we would like to challenge the power of issuing the consultation paper, being outside the purview of Section 132(2)(a) of the Companies Act, 2013, being not in line with the objective of incorporating National Financial Reporting Authority (‘NFRA’). As evident from the function and duties mentioned on the NFRA website, NFRA has the following functions:

Recommend accounting and auditing policies and standards to be adopted by companies for approval by the Central Government;
Monitor and enforce compliance with accounting standards and auditing standards;
Oversee the quality of service of the professions associated with ensuring compliance with such standards and suggest measures for improvement in the quality of service;
Perform such other functions and duties as may be necessary or incidental to the aforesaid functions and duties.

Rule 3 of NFRA Rules, 2018 defines the entities which fall under the purview and governance of NFRA. The same reads as under:

(a) Companies whose securities are listed on any stock exchange in India or outside India;

(b) Unlisted public companies having paid-up capital of not less than rupees five hundred crores or having annual turnover of not less than rupees one thousand crores or having, in aggregate, outstanding loans, debentures and deposits of not less than rupees five hundred crores as on the 31st March of immediately preceding financial year;

(c) Insurance companies, banking companies, companies engaged in the generation or supply of electricity, companies governed by any special Act for the time being in force or bodies corporate incorporated by an Act in accordance with clauses (b), (c), (d), (e) and (f) of sub-section (4) of section 1 of the Act;

(d) Any body corporate or company or person, or any class of bodies corporate or companies or persons, on a reference made to the Authority by the Central Government in public interest; and

(e) A body corporate incorporated or registered outside India, which is a subsidiary or associate company of any company or body corporate incorporated or registered in India as referred to in clauses (a) to (d), if the income or networth of such subsidiary or associate company exceeds twenty per cent. of the consolidated income or consolidated networth of such company or the body corporate, as the case may be, referred to in clauses (a) to (d).


2.       That subrule (1) of Rule 4 mentions the class of investors, creditors and others associated with the companies or bodies corporate governed under rule 3, whose public interest shall be protected by the Authority.


3.       Similarly, Rule 6, 7 and 8 talk about recommending, monitoring and enforcing of various accounting and auditing/assurance standards respectively. Furthermore, Rule 9 provides for overseeing the quality of service and suggesting measure for improvement. Whereas Rule 11 talks about disciplinary proceedings in respect of the entities cited in Rule 3.


4.       The role of chairperson and full-time members has been defined in Rule 14 wherein the matters relating to investigation, monitoring, enforcement and disciplinary proceedings are stated. However, nowhere has any power been entrusted to NFRA to issue any consultative paper or to comment upon any entity (which is not covered under Rule 3) under the NFRA Rules, 2018.


5.       It is hereby represented that no power/right has been granted to NFRA to issue any consultative paper from Ministry of Corporate Affairs (MoCA) by way of any notification/circular and even if the same has been provided for, by way of any reason, it is not available in public domain or on the NFRA website. Consequently, on factual as well as statutory grounds, the report is devoid of any authority/mandate bestowed upon by the Government of India (GOI) on NFRA.


6.       We would like to bring to your kind notice, that the Chartered Accountants are governed by a piece of special, separate legislation, namely - Chartered Accountants Act, 1949, which cannot be overruled by any new or general piece of legislation. Further, the CA Act, 1949 is governed by the Hon’ble Institute of Chartered Accountants which was set up more than 70 years ago, while NFRA is a recent, newly set up body which is still ‘wet behind the ears’. The ICAI and NFRA are both governed by the same Ministry i.e. MoCA, inter alia, with specific, special domain assigned to each of them, which are interdependent and complementary in nature having functions/roles of - Monitoring, regulation and enforcement with accounting standards and various other ancillary function thereof. Consequently, both these esteemed organizations should supplement each other’s working and function in a harmonious manner for achievement of common cherished objectives rather than competing against each other and over-lapping one’s rights and obligations.


7.       It is needless to mention here that ICAI is not being run from the funds given by any authority but is financially independent and the sources of funds are infused from its students and members making it an utmost independent, sovereign authority. Moreover, it is run by a mix of elected members (inter alia the CA fraternity) and government nominated members from varied fields. Thus, bringing the interests of the profession and the stakeholders as the foremost priority. However, NFRA is funded by MoCA, having latter’s indirect influence, which thus hinders with its independence, thereby compromising and degrading its integrity and righteousness.


8.       We now wish to give our Para-wise comments on the Annexures and Appendices 1 mentioned in Consultation Paper:


8.1.    Para 2.1.1 In this para, the phrase ‘ease of doing business’ has been intentionally used to showcase a favorable, encouraging picture on a subject which itself is not even within the domain of NFRA as defined in Section 132(a). It is a factual matter that ‘ease of doing business’ falls under the domain of Ministry of Commerce and Industry (MoCI) which is an independent part of Government of India. We must be apprised if any direction/request has been made by MoCI to NFRA or MCA for commenting/issuing consultative papers on the subject of ‘ease of doing business’. Moreover, the regulation of Accounting and Auditing are not within the framework of “Ease of Doing Business”. Besides this, as per this para, NFRA has to work within the purview of Rule 3 in respect of companies or class of companies or their auditors that is at present ‘listed and specified entities’ and not MSMCs.


8.2.    Para 2.2, 2.3 and 2.4 are factual and are not being commented upon by us.


8.3.    Para 2.5.1 is a definition clause and not being commented upon.


8.4.    Para 2.5.2 states that compliance of General-Purpose Financial Standards (GPFS) are unnecessary and unjustified for MSMCs on a cost-benefit consideration, however such observation is made without conducting any study or research and without any background. This comment contrasts with a finding in para 3.1.2 of the same report that auditors are charging very less as compared to the cost worked out in the report.


It is noteworthy that the cost worked out in the report is rather showing that actual audit cost to the business is minimal in making businesses compliant. Further, the presenter of the report has not envisaged that by virtue of expertise knowledge inculcated to the accountants and entrepreneurs over a period of time, such skills have trained them to prepare and present the financial statements as per law and legal provisions. Thus, making audits cost efficient for businesses. Thus, the claim in this para that GPFS are unnecessary and unjustified on cost-benefit consideration has no leg to stand in its findings and comments, for auditing and business compliance is a specialized skillset which only Chartered Accountants are authorized to perform, and which is inevitable for seamless functioning of any business house.


8.5.    Para The presenter has tried to highlight that the cost is critical for justifying the nature, complexity and extent of financial information required by GPFS. However, as noted in the above paragraph the audit cost to the business is minimal. Further, the presenter has not been able to corroborate it’s claim by any representation made by the actual stakeholders who are complying with GPFS like FICCI, ASSOCHAM, trade bodies, etc., that the cost of complying with GPFS is high and is creating a hindrance in compliance by entrepreneurs. We are of a firm view that the ICAI should make minimum recommended fees mandatory because in the opinion of the presenter, the actual fees being charged is miniscule.


8.6.    Para 2.6.1 are factual and are not being commented upon.


8.7.    Para 3.1.1 In this para the presenter has depicted that as compared to active companies existing in F.Y. 2018-19 and having filed annual return till 30th June 2021 in r/o private limited companies is 52.39% and in case of public limited companies is 53.91%. These figures are factual based on MCA records and there should not be any doubt on these figures.


It is important to note that as per Sec. 248(1)(c) of Companies Act, 2013, if the company does not file its annual return in form MGT-7 for two consecutive years, the company is strike off by the Registrar of Companies compulsorily and based on these records, a finding have been made in this para that this lapse is owing to a lack of adequate accounting professionals. It may be important to note that the filings are not required to be made only through Chartered Accountants, but other professionals are also entitled to do filings and as such the allegations and findings is without proper research.  In fact, the presenter should verify the data of these companies being active with Income Tax and GST Department to confirm whether the companies are filing particulars with other regulators or not rather than discussing about MCA. In fact, the presenter should have suggested as to ways to improve the compliances of filing instead of making allegations on the profession of Chartered Accountants.


In fact, as on 01.04.2021 there are 3,27,081 Chartered Accountants, those who are active and out of them 1,44,136 i.e. 44% are in practice and 11,49,167 filings were to be made by the practicing Chartered Accountants and on & average around 8 companies come under the purview of Chartered Accountant and as such the findings in the first Para of 3.1.1 required to be reconsidered. It is also important to note for the purpose of the consultation paper, the presenter has taken net worth as criteria for classifying micro, small & medium companies, and an amount of 250 Crores have been chosen as to segregate between MSMC & large companies, this definition is completely against the definition of MSME notified by Government of India as companies with Investment of less than Rs. 50 Crore and Turnover less than Rs. 250 Crores. Even the Companies Act has defined Small Companies as companies with Paid up capital up to Rs. 2 Crore and turnover up to Rs. 20 Crore. As such, this segregation itself is without any reasonable justification and thus a matter of concern.


8.8.    Para 3.1.2(i) In this para, the presenter has depicted that there is mistake in entering the data in the MCA filing as in the case of 1,81,392 companies the audit fees have been reported nil and resulted into a finding that there is an indication of lack of adequate accounting professionals. It is a point of concern that without any in-depth analysis or having any discussion or query with the auditors of these companies, how it can be construed that there is an error in filing of data of these set companies and as such the conclusion of the presenter - of removing the statutory audit of “MSMC” is preposterous and a premature finding.


It is further given by the presenter that in order to perform standard audit fee of the medium size companies should be between 1.5 Lacs to 8.43 lacs per annum for which ‘Annexure-III’ with the reports is being given. If assuming, the per month billing on account of audit only as depicted in this table, a normal firm having three partners would have 77.56 Lacs (6,46,397 X 12) and a small firm in metro would have receipts of 9.72 Cr. (81,07,763 X 12) only from the audit work of the companies. Thought the reality is far from the figures shown by the presenter and as such the bases of findings should be realistic and should have been verified either from the Auditors or crossed-verified from the Income Tax Department. There seems to be a wide gap in the way the presenter is making the presumptions and the reality in which the audits are performed. The presenter has not considered that over a period of time the entrepreneur and accountants working in the companies are being trained to make compliances by themselves and especially in India, the auditors are in constant touch with the accountants and difficulties faced by these accountants are being addressed on real time basis. This is thereby resulting into a compliant society for which no cost is being charged by the auditors, in order to fulfil the dream of Hon’ble Prime Minister envisaged for Chartered Accountants as “Partner in Nation Building” and any finding which is being made in this paper vis-à-vis payment to the auditor is out of context and deserves to be ignored.


8.9.    Para 3.1.2(ii) In this Para, the turnover has been considered as criteria for using the findings in the paper. It seems that in the mind of the presenter only the turnover is the factor for the classification, but the fact is that a large number of the companies are existing wherein only investment in the form of immovable properties or securities is being made, for the reason is that in India other structure like LLPs, Trusts are in vogue now which were not popular in the past.


The presenter should have suggested some unique idea on how to make these companies compliant or should have suggested amendments in the Law, these should have be given some alternative structure or method, rather than flatly making such an observation by the presenter which seems vague and inchoate.


8.10.     Para 3.1.2(iii) The presenter has also prepared a depictive chart in Annexure-II, Table 1.5 wherein by way of figures, it is being shown that 44.51% of companies i.e. 2,66,832 have not borrowed any amount and 41.99% of these debt free companies i.e. 1,12,043 are having nil turnover and tried to give a finding that these companies should be kept out of the ambit of Statutory Audit. It is noteworthy that in India the borrowing cannot be a criteria for any finding which is under the consideration at present, because generally borrowings are not encouraged and given preference in the Indian financial and business market. The borrowings are made only when the requirements of the entrepreneur fall short/scarce and not being met by its own resources.


8.11.     Para 3.1.2(iv) The net-worth is also considered as one of the criteria for determining the need of audit and amount below Rs. 25 Cr. has been treated as one of the major factors in giving the finding by the presenter.


The presenter has tried to give the analysis to show that the large number of companies are small companies and are not being paid adequately by the entrepreneur to the auditors. The findings as pointed out in above sub-para 3.1.2(i) to 3.1.2(iv) are not correct and need to be reconsidered.


8.12.     Para 3.2 In this para the presenter has tried to show that the majority of the companies have limited users like owners and shareholders, because they are having no turnover, no indebtedness or low net worth and the presenter has failed to bring on record that if no crime is reported or no violation is reported, it does not give a presumption that there is no requirement of Police in the society, similarly if no compliance is required in the law by the auditors, the entrepreneur will not comply with the law as the auditors are not only making compliance with the law but rather reminding them from time to time to be compliant of the law. It seems that presenter has not examined the long-term impact of entrepreneur being non-compliant with the audit for which the presenter is of the view that the financial cost to the entrepreneurs is not a matter of concern. The presenter has also not examined that such a drastic move may result into a complete loss of track of various assets which are being owned by the so called MSMCs companies.


8.13.     Para 3.3.1 The presenter has tried to depict and compared with the Audits conducted in Income Tax & GST without understanding the fact that those audits are on a completely different footings and it is a matter of fact that even though the compulsory audit have been done away in some of the taxation legislations. It is a matter of record that no entrepreneur can do the filings and the compliances which are earlier certified by the Chartered Accountants but now they are to be certified by the entrepreneur himself. The legislature has quoted in this para that the presenter is yet to see the effect of removing or enlarging the area of the financial audits and the changes which are made will result into a non-compliance entrepreneur as is explained above that the auditors are doing the jobs of a policeman in the financial sector as police does in the society, the presence of police can not be undermined in any circumstances.


8.14.     Para 3.3.2 are factual and are not being commented upon.


8.15.     Para 3.3.3 The presenter has tried to compare India with European Union (EU), United Kingdome (UK), Singapore, Australia, United State of America (USA) and Japan, it is important to note that India is the second largest body of the accountants but the nature of compliances in all these developed countries are much higher than India and as such any comparison amongst these countries is unequal to compare and it is also important to note that the presenter has not given any figure as to how many corporates are existing in these developed countries and how many accountants are there, as we have explained in above Para 3.1.1 that there is no dearth/shortage of Chartered Accountants in India. The presenter has also not compared per capita-income, GDP, percentage of literacy, cost of compliances, no. of availability of CAs, cost of manpower per hour of these countries while quoting and comparing with the same countries and as such any finding on the base of these developed countries are not at all meaningful and deserves to be ignored.


8.16.     Para 4.1   The presenter has tried to give a finding that audit is a “sham”, there is limited users of GPFS, majority of MSMCs are family owned and are being formed for sake of limited liability or to get loans, bus routes permit, mining licenses and are glorified proprietorship or partnership having no public interest and statutory audit is not at all desirable or mandatory. The presenter has defamed the auditors by quoting their good work done since 1956 as “sham” and leveled a kind of dent on the prestige and fame on the esteemed fraternity of 3,27,081 Chartered Accountants spread across the country, without any rationale and any factual finding or without any authority of such comments, which should be scrutinized and dealt with properly in respect of the factual observations, the legal provisions and more so, on the kind and type of words and language resorted to in the said consultation paper.  


The points on which NFRA sought comments have been dealt in above Paras, but for the sake of repetition are reiterated as follows:


Clarification Sought    View of CA Sanjay Kumar Agarwal
            Query - 1        Discussed in Para 8.12 above
            Query - 2        Compliance Procedure should be simplified
            Query - 3        Discussed in Para 8.8 above
            Query - 4        The process of standardization and uniformity should be left at ICAI.

The undersigned vide this representation reserved the right for a proper explanation and reply as to who gave the authority to prepare such consultation paper, in which meeting it is being approved and why the same is not being signed by anyone from the issuing authority.


Thanking You

Yours Sincerely

CA Sanjay Kumar Agarwal

Mob: +91 9811080342

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