We live in a free society yet this editorial is written differently. You see, a newly-formed regulator (let’s call it NFR) brought out a paper with a view to seek comments. The NFR is funded by taxpayer money, the paper is in the public domain, the purpose of the paper is ‘consultation’ with stakeholders and the paper carries no proprietary inventions, secrets or exclusive material. Yet, the NFR has posted a notice on the report stating that
no part of its report can be ‘reproduced’ or ‘circulated’ without its permission except for the purpose of making comments on that paper (that it is seeking or to NFR). So how should one deliberate the matter the paper seeks comments on, if one is forbidden from quoting it?
Often such ‘consultation’ is ‘conclusion’ in disguise. Papers like these are a spectacle of ‘superfluousness’ wrapped as ‘engagement’ (in case you didn’t know it, this is a typical Babucracy tactic where Delhi officials call for deliberations on a ‘pre-concluded’ agenda and the meeting is just for ‘due process’).
Take another trait: the paper doesn’t reveal what it will do with the comments! Place them in the public domain? What weightage will they have? Will they complete the ‘research’ and include responses as part of it? Well, a public body must at least demonstrate transparency, integrity and objectivity to the public. By publishing the comments from a wider audience of stakeholders, duly ‘appraised’ by an independent third party, will only add to their reliability, especially when these are meant for the purpose of policy!
Let’s look at the paper per se. The paper claims to give ‘research’ data. In the same breath, it qualifies the integrity of key data points by stating that there could be errors in that data which forms the basis of the NFR’s conclusions. For example,
it states that about 1.8 lakh companies paid no audit fees for their audits; it also declares that this data could be erroneous and yet it says that payment of audit fees is a burden on ease of doing business! Could this be cognitive dissonance (confirmation bias)? The source data could be entirely wrong (in Form AOC 4 companies could have put several expenses including audit fees under one category rather than giving a break-up) which makes the paper’s conclusions absurd. A plain reasonableness test with meagre application of mind informs us that so many audits can’t be free! A slight effort to test this preposterous assumption with actual financials, even on a test basis, would have cured this fallacy.
Friends, the paper is a string of inaccuracies, false equivalences, cherry picking, baseless opinions and aspersions which show that it is casual and rather malicious.
Irrespective of the quality of the paper, should one ask a moot question: whether audit is not required for certain companies and jump to a Yes-No conclusion? In my view we cannot answer it till we can look at more data, do surveys and see what is achieved by audits for each type of entity depending on stakeholders’ needs, and the consequences of audit exemption. This, to be truly and honestly done, needs a wider discussion and not a paper from a regulator who has no ground level experience, no skin in the game and who is not even mandated.
Audit does a number of things for a wide spectrum of entities and more particularly SMEs and audited financials form the basis of several certificates and filings for various stakeholders. It’s a known fact that an audit adds value to SME entities in a real sense if they so desire. The NFR thinks the sole reason for audit is public interest.
Now let’s approach ease of doing business – as ‘ease of financial reporting and audit’ the NFR paper is cheesy: 1. No comments are carried about the numerous thresholds / exemptions for audit reporting – CARO, ICFR, Ind AS – AS, SMC, OPC. The Paper cherry-picks only one of these limits (the highest) and that too without assigning any reason. 2. Audit follows accounting and reporting; however, there are no comments about application of say Schedule III and other filings applicable to smaller companies. 3. No new ideas such as a Small Companies Act, 202X not just SME SA which has been talked about for years! 4. The paper lacks original ideas and conceals its lack of creativity with examples from the EU and the USA – from whom India is far away and much different. 5. The NFR paper gives references to state laws of the US and the EU, but no comparison with Indian parallels to see whether our business environments are even comparable. 6. It determines causality of low MCA filings by companies to lack of accounting professionals with them but without any reason or facts when filings could be arduous for small businesses. 7. It calls Rs. 50 crores as low turnover (NFR budget is less than that). 8. Says, banks do not rely on GPFS (I don’t know of a banker that doesn’t ask for GPFS before any conversation at all). 9. The NFR paper calculates imaginary standard audit costs and applies them to companies to make a point that is false and deceptive: audit costs are between 0.5% to 58% of PBT across various sizes of companies! It goes on to state that good quality audit will require an estimated standard COST of Rs. 1.50 lakhs (0.03%) to about Rs. 8 lakhs (0.16%) for companies with below Rs. 50 crores turnover. Fact: HPCL (a global Fortune 500 company with turnover of Rs. 2.98 lakh crores) in 2019-20 paid 0.000024% (Rs. 72 lakhs) as audit fees. By the NFR paper’s logic, the audit quality must be abysmal!
The paper is full of outlandish assumptions, fantasy, callousness, disregard for facts and bias.
While the reader should make her own judgement, let me leave you with the grand crescendo: about 3,500 out of six lakh active companies deserve audit as they fall within the Rs. 250-crore net worth benchmark.
I don’t even feel it is necessary to look at the effects of putting into practice what the paper construes. Why should NFR, which has never dirtied its hands in a real audit situation (and today auditors audit a market cap of $255 trillion plus the value of unlisted entities), give its brash verdict on audits and auditors? One can only extend the ‘logic’ and ‘verbiage’ of the NFR paper to infer that the amount paid for preparing this paper must be NIL since it cannot boast of any quality at all. As the title of this Editorial suggests, the reader can choose how much of this paper is about consultation, how much about conclusion and how much conspiracy!
Raman Jokhakar
Editor
