In India, the financial auditing landscape is complex, especially for multinational companies (MNCs) operating in the region. According to a survey by Deloitte, 78% of MNCs report that staying compliant with India’s financial regulations is a significant challenge. Furthermore, the World Bank’s 2023 Doing Business Report ranked India 63rd in ease of doing business, partly due to regulatory complexities in areas like taxation, audit requirements, and compliance. For MNCs to thrive in India, understanding the financial audit requirements is crucial to avoid non-compliance penalties and maintain transparency.
In this blog, we will explore the financial audit requirements for MNCs in India, including the statutory framework, types of audits, and key considerations for compliance.
Key Financial Audit Requirements for MNCs in India
Statutory Audits
The Companies Act, 2013, mandates statutory audits for all companies registered in India, including MNC subsidiaries. These audits are conducted to verify whether the financial statements provide a true and fair view of the company’s financial position. Statutory audits ensure that businesses comply with Indian Accounting Standards (Ind AS) and other regulatory frameworks, including the Companies Act and the Income Tax Act.
Key Requirement:
MNCs must appoint an independent auditor approved by the Institute of Chartered Accountants of India (ICAI) to conduct an annual audit. The auditor prepares an audit report and submits it to shareholders at the Annual General Meeting (AGM). Non-compliance with statutory audit requirements can result in penalties or even criminal liability for the company’s directors.
Internal Audits
For MNCs meeting specific criteria, such as turnover exceeding ₹200 crore or borrowings above ₹100 crore, internal audits are mandatory under Section 138 of the Companies Act. Internal audits help evaluate the company’s internal controls, risk management processes, and operational efficiency.
Key Requirement:
An internal auditor, often from within the organization, is appointed to conduct periodic audits throughout the year. MNCs must ensure their internal audit processes are in place, covering areas like fraud prevention, internal controls, and adherence to corporate policies.
Tax Audits
India’s Income Tax Act requires companies with annual gross receipts exceeding ₹10 million to conduct a tax audit. This is to verify the correctness of income tax filings and to ensure compliance with tax laws.
Key Requirement:
A certified chartered accountant must conduct the tax audit and submit Form 3CA or 3CB along with Form 3CD to the Income Tax Department. Non-compliance with tax audits may lead to heavy penalties and a higher likelihood of scrutiny from the tax authorities.
Transfer Pricing Audits
MNCs engaged in cross-border transactions between affiliated companies must adhere to transfer pricing regulations under the Income Tax Act, 1961. These regulations ensure that transactions between related entities are conducted at arm’s length prices, preventing tax avoidance.
Key Requirement:
MNCs with cross-border transactions exceeding ₹10 crore must submit a transfer pricing report certified by a chartered accountant, using Form 3CEB, to the tax authorities. Inaccurate reporting or failure to comply with transfer pricing regulations can lead to severe penalties, ranging from 2% to 4% of the international transaction value.
GST Audits
Goods and Services Tax (GST) is a crucial aspect of financial compliance in India. If a company’s annual turnover exceeds ₹5 crore, it must undergo a GST audit. The purpose of the GST audit is to verify that the company has accurately paid taxes and claimed input tax credits.
Key Requirement:
The GST audit must be conducted by a certified chartered accountant, and the findings must be submitted in Form GSTR-9C, along with the annual GST return (GSTR-9). Ensuring GST compliance is essential to avoid interest, penalties, and disruption of business operations.
Additional Considerations for MNCs
Compliance with Indian Accounting Standards (Ind AS)
MNCs in India are required to follow Ind AS, which is aligned with International Financial Reporting Standards (IFRS). Ind AS applies to companies with a net worth exceeding ₹250 crore. Compliance with Ind AS helps ensure consistency in financial reporting and transparency for stakeholders.
Key Requirement:
MNCs must implement Ind AS in their financial reporting systems to ensure they meet both local and global standards. Failure to comply with Ind AS can result in inaccurate financial reporting and audit qualifications, damaging the company’s credibility.
Appointment of Audit Committee
Under the Companies Act, companies meeting specific thresholds (e.g., listed companies or public companies with a paid-up capital exceeding ₹10 crore) must establish an audit committee. This committee oversees the auditing process, internal controls, and financial reporting.
Key Requirement:
The audit committee must consist of independent directors and meet periodically to review audit findings and address any concerns regarding financial management and internal controls.
Corporate Social Responsibility (CSR) Audit
For MNCs with a net profit exceeding ₹5 crore, CSR spending and compliance have become mandatory under the Companies Act. Companies must contribute at least 2% of their average net profits from the last three years towards CSR activities and disclose these expenditures in their financial statements.
Key Requirement:
CSR audits ensure that the company is meeting its legal obligations in contributing to CSR initiatives and reporting them accurately in the financial statements.
The Importance of a Strong Audit Framework
For MNCs in India, financial audits are not just about regulatory compliance—they are also vital for maintaining transparency, mitigating risks, and improving investor confidence. A robust audit framework ensures that MNCs can identify potential inefficiencies, address compliance gaps, and enhance overall financial management.
Conclusion
Navigating India’s audit landscape can be challenging, but by adhering to statutory requirements, MNCs can ensure long-term success and avoid penalties. With the right tools and expertise, including automation software and qualified auditors, MNCs can streamline the audit process and stay ahead of regulatory changes. Partnering with a reliable accounting firm like Finsmart Accounting can further ease the burden by providing expert assistance with statutory, internal, tax, and GST audits, allowing MNCs to focus on their core business while maintaining full compliance.
Founder & Director
Shalaka Joshi, a Chartered Accountant passionate about outsourcing and problem-solving, brings over 20 years of extensive experience in accounting, payroll, and MIS reporting to her professional endeavors
