NFRA exercising powers outside its jurisdiction


NFRA issued a consultation paper on exemption of audit of small companies in September 2021.

Seven Chartered Accountant’s (CA) associations have said that the National Financial Reporting Authority (NFRA) does not have the power to issue the consultation paper which it did on the statutory audit of Micro, Small and Medium Companies (MSMCs).

The associations issued a letter which stated that a government agency requires a mandate and jurisdiction but, NFRA cannot regulate the class of companies for which it has issued the consultation paper.

“The Institute of Chartered Accountants of India (ICAI) believes that the NFRA is not authorized to issue such paper. The paper is completely baseless without NFRA being authorized [to issue such papers],” said a central council member of the ICAI.

Advocate and Professor Shreya Madali explained, “NFRA being a body established under the realm of the Company law to oversee matters related to accounting and auditing spheres, definitely shall be given its due as an advisory body concerning the same areas. However the lack of clarity upon its jurisdiction over small and medium companies makes its authenticity of issuing the consultation paper underconsideration, ambiguous.”

NFRA was constituted under the Companies Act, 2013 in October, 2018. It was established as a body to oversee the quality of audits of listed companies, companies engaged in business of banking, insurance and electricity, and other large companies qualifying criterion as established in the NFRA rules, 2018.

CA Abhay Mehta, President of the Bombay Chartered Accountants Society said, “They don’t have authority under the Companies Act, 2013 and it is beyond their powers that they have issued this consultation paper.”

The definition of MSMCs (coined in the paper for the first time) in itself is a new definition which is not a part of the Companies Act, 2013 or any of the rules framed thereunder.

CA Monish Shah, President of the Chartered Accountants Association, Ahmedabad, said “Even if a new definition is required, it should come from the Ministry of Corporate Affairs (MCA). NFRA coming up with such a definition, that too without ICAI’s consultation is not correct.”

The focus of the consultation paper is companies with net worth of less than Rs.250 crores. The letter suggests that such a limit is higher than several other threshold limits under the law wherein exemptions from a few compliances are given. Even if such an exemption is required, multiple criterion shall be considered wherein, even if one of the criteria is satisfied, the exemption shall not be available to the company.

Mehta expressed his concern over such a high limit. “NFRA is a body formed under the Companies Act. It should follow the terms and criteria laid down in the Act. However, they have come up with a new requirement of Rs.250 crores net worth which has never been the case for other countries as well, for exempting certain small companies from audits. With such limits being set, 99 percent of the companies will be out of the purview of audit as many listed companies as well do not have such net worth.”

Mehta also believes that any company not audited would find it difficult to be evaluated and to avail borrowings.

Ease of doing business was cited as the primary reason for such exemption of audits of small companies in the consultation paper and news reports earlier. However, the World Bank had announced during September 2021 to discontinue with the Doing Business Report, owing to several internal data irregularities.

However, Madali suggests that several relaxations ought to be granted to small companies. “Small companies are often at the receiving end of robust, lengthy and complicated compliances in the regulatory domain. The relaxations of certain procedures in the form of exemptions would certainly be of some respite for small companies. Though, I’m not in the support of a complete audit exemption.”

Shah explained, “If you really want to bring ease of doing business, the laws needs to be simplified. By ruling out audits, or increasing the audit limits to Rs.10 crores or Rs.15 crores [of revenues] is not the way of dealing with it. If a person needs to apply five or ten times for GST registration, ease of doing business will never be achieved.

“Ease of doing business means to smoothen something. You don’t remove or delete it. It is a need but the way that they are doing, and the means that they are using to do it, is not correct.”

Earlier a media outlet published a bulletin on its social media handle claiming that the MCA is expected to abolish statutory audit for small companies, but there were reports that the Ministry of Corporate Affairs has no plans to abolish audit of small companies, and the news was a mere rumour. But within several days, the consultation paper was issued by NFRA.

The letter to NFRA further states that the consultation paper has been worked upon keeping the end conclusion of exemption in mind. However, several mails to the authorities at NFRA did not elicit any response to understand the reasons behind exemption of audits of small companies.

An official verdict from NFRA is expected in the next month, as the window for comments on the consultation paper ends on November 30, 2021.