ICAI’s new standards legally void: NFRA
October 17, 2024
NFRA board, including members like SEBI, CAG and RBI, is of the opinion that SQMs have to be notified as auditing standards (with legal backing) whereas the ICAI maintains that SQMs are not standards of auditing.
The National Financial Reporting Authority (NFRA) is understood to have taken strong objections to the Institute of Chartered Accountants of India’s (ICAI) recent revision of a clutch of audit standards, calling it “illegal.” The authority is likely to take the matter up with the government.
The ICAI released the revised standards of quality management (SQMs) on Monday, and along with these a series of concomitant SAs too.
“The ICAI doesn’t have the powers to change standards of audit. As per ministry of corporate affairs’ (MCA’s) directive, any modifications in standards have to be examined by the NFRA first. They have revised the standards without consulting us. This is illegal and void ab initio,” an NFRA source told FE, on condition of anonymity.
The SQM revision was overdue, and was needed to take into account new realities in audit practice, give due emphasis on risk assessment, and bring in tailor-made, scalable audit systems. The shift from SQC to SQM has been taking place globally over the last few years.
“In August this year, ICAI had asked for three weeks to send the SQM draft to NFRA but now they have released the SQMs without showing us the draft,” the source said.
NFRA board, including members like SEBI, CAG and RBI, is of the opinion that SQMs have to be notified as auditing standards (with legal backing) whereas the ICAI maintains that SQMs are not standards of auditing.
“Given that NFRA has been kept in dark by ICAI, we are going to examine the revised SQMs afresh. Our team is already studying the SQMs released by ICAI. In NFRA’s next board meeting in November, we are going to consider this issue,” the source said.
In August 2021, the MCA had written a letter to ICAI, requesting it to consult NFRA under section 143 (10) of the Companies Act, before issuing audit standards. The standards would finally be notified by the government.
As per ICAI’s website, SQM1 will come into effect from April next year whereas the SQM 2 has to be implemented from April 2026. “It seems that the ICAI is defying the government’s orders. Since these changes doesn’t have the government’s nod, the practicing chartered accountants (CAs) will have no option but to ignore these standards,” the source said.
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. ICAI has also said that the extant corresponding standard – SQC 1 – will continue to be applicable till these standards become applicable.
[The Financial Express]
