The Institute of Chartered Accountants of India (ICAI) has countered the view of the National Financial Reporting Authority (NFRA) that the former’s recent modifications of the standards of quality management (SQMs) are “legally void,: saying these included a bunch of standards, which have been historically regulated by ICAI. “We don’t require NFRA’s approval to modify them,” said an ICAI source, requesting anonymity.
“The NFRA has say over 35 standards of auditing (SA) whereas 12 other standards come under ICAI’s domain. The objective of these revised standards (SQM 1 and SQM 2) is to enhance and ensure quality at the firm level for all professional services rendered by firms. ICAI has diligently followed all due processes to update and revise the existing standards to align with global best practices,” said the source.
As per ICAI, section 143 (10) of the Companies Act clearly states that the central government will prescribe standards of auditing (SAs) with the recommendations of the ICAI, and with the consultation of the NFRA.
ICAI argues that standards other than auditing exclusively come under its purview. These “non-auditing” standards include standards on specialised areas, review engagements, assurance engagements, related services and quality management. “We continue to regulate these 12 standards even after NFRA has been formed. Additionally, the changes in SAs as a result of modifications in SQMs are merely consequential,” said the source.
NFRA board, including members like RBI, SEBI and CAG, have maintained that SQMs have to be notified as auditing standards (with legal backing) even as ICAI doesn’t recognise them as standards of auditing.
Meanwhile, NFRA is scheduled to have its next board meeting on November 11 and 12 where the authority will likely discuss the adoption of revised SA600 which was put for public consultation recently.
On October 14, ICAI released the revised SQMs along with a series of concomitant SAs too. NFRA has raised objections against the modifications in a bunch of SAs claiming that ICAI has no authority to change SAs prior to its approval.
As per ICAI’s website, the SQM 1 and SQM 2 will be implemented on a recommendatory basis from April next year, and will become mandatory by April 2026. These two standards will replace the extant SQC (standard on quality control) once they take effect. While SQM 1 deals with a CA firm’s responsibilities to design, implement and operate a system of quality management for audits or reviews of financial statements, SQM 2 talks about the appointment and eligibility of the engagement quality reviewer and the review process.
