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The comments given below on the subject called for by NFRA are purely my personal views, given in individual capacity to protect the public hard-earned money, safeguard the interest of stakeholders and to save Indian economy.

Before, I go on to the subject, I would like to bring to your notice the title of an article published in a newspaper that reads as below:

“Top 100 willful defaulters owe lenders Rs 84,632 Cr, as of March 2020, banks have written off loans worth Rs 62, 000 Cr and as of March 2019 banks have written off Rs 58,375 Cr loans of defaulters”. This is how the banking industry has been burning for years together.

As per ETBFSI July 03,2021:

About 15.90% of loans less than Rs 25.00 Cr to the MSME sector for public sector banks have turned bad as of March 2021 rising from 13.1 in December 2020.

We cannot allow the banks to burn continuously to save the cost of a Match Box? Should we.............?

One may not trust his wife, but he trusts a Chartered Accountant and takes the audited balance sheet into confidence for any further economic decision.

A father cannot allow his son to rob a bank or do a fraud just because he is taking care of him. The son must be put under discipline? What the regulatory authorities as a father wants to do? The concern is only in respect of bad sons and not of good ones.

Comments on NFRAs Consultation Paper On Statutory Audit And Auditing Standards for MSMCs

Question No: 1

Do you think that the Micro, Small and Medium Companies (MSMCs) depending upon some criteria and threshold should be exempted from the mandatory statutory under Companies Act,2013, if not, why not and if yes, what would be the criteria and thresholds for exemption?

Reply: No for the following reasons:

A. Need for audited balance sheet to the banks.

  • To sanction or renew the existing limits.
  • To check and confirm financial health condition of the borrower.
  • To check and confirm whether the company has utilized the working capital loan limits for the purpose for which the limits were sanctioned or diverted for any other purpose.
  • To check whether drawing power as stipulated in sanction letter is maintained or not.
  • To check whether working capital margin as stipulated in sanction letter is maintained or not.
  • To check whether foreign exports are realized within six months or not.
  • To check age of the receivables.
  • To check the overdue statutory dues and confirm the status of legal compliance of all the statutory requirements.

B. Need for audited balance sheet to other stakeholders:

  • For the investors to invest in the company and to mentor the performance of the company from time to time.
  • For the shareholders to trust financial results declared by the management.
  • For Rating Agencies for rating the MSME borrowing capacity.
  • For the Government Agencies to cross verify the information filed with them and to check whether any tax evasion was there.

The above list is not exhaustive.

All the companies wherever third person interest is involved, the books of accounts of MSME companies must be audited to safeguard the interest of stakeholders.


Question No: 2

Do you think there is a requirement for a separate set of auditing standards for MSMECs as it exists for accounting standards? If no, why not and if yes, what should be the basis for the same?

Reply: No for the following reasons:

The present set of accounting and auditing standards as applicable to small companies is enough and no need for a separate set of accounting or auditing standards. What requires is modification in the format of company balance sheet as it lacks transparency and does not give a true and fair view. The deficiency in the format of company balance sheet is giving scope for omission and concealment of facts that has been influencing further economic decision of the stakeholders. The stakeholders have been paying the cost of deficiency in the format of company balance sheet running into lakhs of crores of rupees.

Question No: 3

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 NEFRA? If not, which area /assumptions need change?

Reply: No. I don’t agree with NEFRA on this aspect for the following reasons:

Here is a case study on how the audit fees is being charged by the auditors.

A passenger will ask a CA to drop him at a railway station. The fees structure of MNC audit firm and a small CA firm is given as under:




MNC Audit firm


Small CA firm



For opening car doors Rs 500* 2(times)




For changing the gears Rs 500 * 10(times)




For petrol




Visiting Charges




Total charges



The passenger will pay the MNC firm before getting down from the car.

In case of small CA firm, the passenger would not pay the charges on his own but if the small CA asks for charges, the passenger will say “I WILL SEND YOU THE CHARGES LATER “and the chances for small CA to get the charges is 50%.

What NEFRA has noticed in their analysis of cases where the cost of audit paid appears to have been abnormal and burden on SME sector is the charges of MNC or big firms as mentioned in above table.

The SME sector perse facing lot of problems like shortage of funding due to non-availability of required collateral securities. Take the case of Ministry of Food Processing Industries, Govt. of India who has launched PLI scheme extending financial assistance as a specified percentage of subsidy on incremental sales. The MOFPI has provided budget of Rs 10,996Cr to extend financial assistance for five years under the scheme. Out of Rs 10996Cr, Rs 250.00 Cr is provided for MSME sector and Rs 10,746 Cr is for larger scale units. The other condition is that a SME unit is eligible to apply for subsidy under PLI scheme of MOFPI, if its previous year turnover for each product is in excess of Rs 1.00 Cr. How many SME units could meet this prerequisite condition to make themselves eligible to claim for subsidy under PLI scheme?

The MSME units doing well and having sizable turnover have been approaching big firms or MNCs. The SME units not doing well because of various influencing factors have been approaching small CA firms for audit of their companies. These are the reasons why the small CA firms have been charging audit fees at very low level.

In case the size of fees is the deciding factor to measure the quality of audit, then how the big corporates have been diverting funds as reported above and why the MNC audit firms have not been reporting such cases of diversion of funds in their audit reports and why the banking industry has become helpless in this regard? Where does SA 240 has gone?

The quality of audit would definitely be compromised and the independence of the auditor may be at a question when the client is paying a sizable amount of fees to have the audit of the company permanently with the firm.

The only solution to ensure quality of audit is introduction of mandatory rotation of auditor’s appointment based on the size of interest a third person like banks or public has in the company.

We cannot compare with other countries in dispensing with audit requirement of MSMECs based on some criteria as every third person in India is trying to defraud the banks or other stakeholders. A fraud takes place at every minute in India. The results are that number of companies have become sick and the banks have written off Rs 6.00 lakhs Crores of NPAs in the last three years. What is the NPA level of banks in other countries?

Dispensing audit requirement by Indian Tax Laws:

The Indian Tax departments of CBDT and CBIC are concerned with only revenue and tax compliance and the departments have their own mechanism to get all the related information of companies from time to time. It is not the case with other stakeholders as the basic source of reliable information for them about the financial affairs of the companies is the audited balance sheet only. The regulatory authorities cannot expect the stakeholders to rely on unaudited balance sheet of companies as there is every possibility for defrauding the stakeholders by unscrupulous fraudsters and our country can no longer bear the cost of bank frauds. The regulatory authorities shall have to ensure to the stakeholders that the information presented in the company’s balance sheet is transparent, authenticated, reliable, gives a true and fair view and does not influence further economic decision of a stakeholder.

Question No: 4

Do you think the current exemption thresholds for CARO, ICFR and statutory audit applicability need to be standardized and made uniform? If no, why not and if yes, what would be the criteria and thresholds

Reply: No. Applicability of CARO, ICFR and statutory audit need not be

standardized further and made uniform and the status quo may be maintained.

The CARO 2020 format is totally theoretical and not practical. The presentation of CARO must ensure to the stakeholders and the regulatory authorities that in the given case, the auditor has discharged his professional duties without fail.

When a question in the CARO starts with “Whether.................”, there is every possibility that the auditor would say ‘YES” without going into further details. The clauses covered in CARO 2020 must be informative in a table format, easily referable, accessible and should be commented thereon wherever the information provided is negative and influence further economic decision of stakeholders.

In case the question in the CARO starts asking to “Furnish or Submit” the details of ....................and report thereon, the auditor will be under obligation to verify the details called for, furnish or submit and report thereon. For example: Furnish the details of funds diversion in the following format and report thereon.



Rs In Lakhs

(A) Source


Profit after tax




Other intangible assets W/o


Addl. equity brought in


New Term Loan


Total A


B) Application


Term loan Installments paid


Fixed Assets acquired


Dividend paid


New Investments made


Total B


Fund Diversion (A-B)


Auditors Comment on the diversion of funds

The company has diverted Rs XXXX lakhs of Cash Credit limits for investment in capital market against to the terms of bank sanction letter. As the diversion of funds from operations impacts the functioning capacity of the company, there is every possibility that the company may become sick and the bank loan account may be declared as NPA shortly.

In view of CARO presentation as reported above, the CARO 2020 report can be made simple, practical and it can also ensure to the stakeholders and to the regulatory authorities that in the given case, the auditor has discharged his professional responsibilities.

Further, CARO 2020 should start with an Index page wherein clause wise and page wise requirement of reporting are covered that is given as below:




Clause No

Page No


Financial Health condition of the company.

  1. format of report in the Audit Report:

Sl. No

Financial Ratios


Standard/Bench Mark Ratios

Remarks of Auditor



Financial irregularities:

  1. Diversion of funds for other purposes
  2. Absence of Drawing Power
  3. Absence of W.C. Margin
  4. Overdue book debts
  5. Export receivables due for more than six months
  6. Overdue term loan installments
  7. Statutory dues
  8. Unaccounted revenue


Legal Compliance:

  1. Companies Act
  2. Money Laundering Act
  3. FEMA wherever Applicable
  4. Binami Act
  5. CGST Act,2017 of all the applicable provisions
  6. Income Tax Act,1961of all the applicable provisions.
  7. Etc.,


Qualifications on the Financial Statements.






The above Index would enable the stakeholder to have easy reference of page or clause where particular audit requirement is reported and avoid need for going through each and every clause for any related information on the financials of the company.


As mentioned above:

a) the quality of Audit can be ensured when the mandatory rotation of audit appointment of companies is mandated on specified criteria,

b) when the auditor is made under obligation to verify and furnish/submit the details of information called for in CARO 2020 and

c) finally, when the format of company balance sheet is made transparent and does not give scope for omission and concealment of facts on the face of balance sheet.

As pointed by NFRA in consultation paper, the audit fees would never be burdensome on to the MSMCs. In case, NFRA takes any drastic decision to exempt the need for statutory audit of MSME companies for any reason, the size of frauds would go up, industries would become sick, banks net worth would get eradicated, the public hard-earned money will be wasted, the interest of stakeholders would be seriously affected and Indian economy will be in doldrums.

I hope NEFRA would take a positive decision keeping in view the above facts into consideration to safeguard the interest of stakeholders, protect public hard-earned money and save Indian economy.

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