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NFRA and ICAI have divergent view of small business regulatory reporting

India’s top two statutory bodies have been in discussions regarding reducing the auditing burden on small businesses. The main point of distinction between the two government agencies has been about the ambit of jurisdiction.

Accounting rule maker and self-regulator of professionals, Institute of Chartered Accountants of India (ICAI), differed with audit regulator National Financial Regulatory Authority (NFRA) over whether the latter has the authority to decide if small businesses need to be audited.

ICAI is a statutory body that regulates chartered accountants and comes under the Ministry of Corporate Affairs administration. The NFRA, on the other hand, was set up under the Companies Act to recommend accounting and auditing policies and standards to the government and enforce compliance with accounting and auditing standards.

In line with this administrative structure, NFRA recommended that the ICAI conduct a regulatory impact assessment of certain proposed revisions to the existing Indian Accounting Standards. This approach paper was transparent and carried out through extensive nationwide consultation with primary stakeholders of micro, small and medium companies.

At the heels of the study and approach paper, specific recommendations were made by the regulatory authority:

  • The NFRA opined that most companies subjected to regulatory impacts and audits would be private, have minimal turnovers, and have insignificant indebtedness.
  • Hence, it recommended that ICAI reconsider accounting standards’ structure, form, and contents for such companies.
  • The NFRA asked for the standards to be aligned to the:
    • nature
    • size
    • complexity
    • commercial needs,
    • business size and
    • capacity to comply with the prescribed standards

ICAI, however, had a different perspective. Differing from the recommendation made by the NFRA, ICAI asserted that a detailed audit of a company, irrespective of its size and affordability, helps mitigate the risk of corporate governance lapses.

Examining NFRA’s authority to preside over micro, small and medium companies, ICAI cited its preliminary analysis on the key financial parameters of the companies and said the fees paid to auditors by a large majority of MSMCs are way below what an audit, when performed in compliance with the letter and spirit of the standards of auditing, would require.

Against this backdrop, NFRA does not have jurisdiction over MSMCs.

ICAI has suggested the introduction of a single platform for regulatory reporting so that the same information is not required to be filed with various regulators.

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