Should small businesses be exempted from statutory audit?

India’s tradition of accounting, auditing and reporting practices dates back tens of centuries. Through his studies, this author was able to find in the publications of several scholars Indian practices of reporting and accountability of those responsible for the chessboard dating back to 1500 BC.

According to Arthshastra of Kautilyathese practices have continued over the centuries with progressively improved processes to ensure accountability of Rajashyas (levies from the kings) and expenses to run the kingdoms. The underlying purpose of requiring such accountability was the mitigation of perceived risks by kings. Pre-Vedic and Vedic literature, written by Rishi (sage) Veda Vyas, sages of his clan, and other later publications, also contain references on auditing. Audit compliance is therefore not a new demand in this country.

On September 28, the National Financial Reporting Authority put up a Consultation Paper on Statutory Audit and Auditing Standards for Micro, Small and Medium Enterprises. The overriding objective behind his proposals is to improve India’s ranking for the ease of doing business in reports published by the World Bank. It is a perceived reality that such a rank, presented as a mark of prestige for any economy, has prompted many countries to reduce and/or simplify legal and regulatory red tape. However, it is also a fact that the World Bank stopped publish these reports due to irregularities and manipulation of data.

So let’s leave the ranking itself behind and look at the top ten criteria on which countries were assessed for this index. Briefly, these major sub-indices are: ease of starting a business measured using certain metrics, obtaining permits for building facilities, connecting to electricity, registering properties, obtaining credit and loans, protecting investors’ rights, paying taxes and duties, conducting business across borders, enforcing contracts and resolving insolvency quickly.

With these ten parameters in mind, the key question to be answered is whether the audit exemption would be of any help to MSMEs in starting and running a comfortable business. Readers should be aware that two audits under the GST Act and tax audits under the Income Tax Act have already been abolished for entities whose turnover does not exceed 10 crores of rupees. For the latter, the exemption is rightly granted only if more than 5% of the transactions are not carried out in cash. Exemptions have also been granted to many individuals under the Companies Auditor’s Report Order 2020.

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