Issuing audit quality standards within our remit: ICAI writes to MCA amid ongoing tussle with NFRA
Oct 24, 2024
Synopsis
The ICAI has informed the corporate affairs ministry that it has the authority to issue quality management standards for accountancy firms. This comes after NFRA objected to the ICAI’s new standards. The ICAI plans to implement these standards from April 2026. The ICAI has called a special meeting to discuss the matter further.
The Institute of Chartered Accountants of India (ICAI) has written to the corporate affairs ministry, asserting that it has the mandate to issue quality management standards for accountancy and audit firms, amid its tussle with the National Financial Reporting Authority (NFRA), people aware of the development said.
The letter, sent to the ministry last week, comes after NFRA objected to the ICAI’s issuance of two new standards on quality management (SQM)—called SQM1 and SQM2—and 16 “consequential changes” in auditing standards on October 14.
The institute has argued these quality management standards are not auditing standards, so it’s within its right to issue them without audit regulator NFRA’s clearance, one of the persons told ET.
The ICAI expects firms to mandatorily adopt SQMs, which will replace the 2007 standard on quality control, from April 2026.
It maintains that the SQMs cover all services rendered by such firms, going well beyond just auditing, and are, therefore, distinct from auditing standards.
The latest issue is likely to further escalate the tussle between the two regulators, which first surfaced in August over NFRA’s bid to align the domestic audit standard with the global norms.
The ICAI has now called a special meeting of its Central Council on October 29 to deliberate on NFRA's proposal to revamp the Standard on Auditing 600 and the SQMs, the person said.
For its part, NFRA reckons that SQMs should be treated as a part of audit standards as these are intricately linked, and notified by the ministry following the audit watchdog’s recommendations. It feels that the SQMs, firmed up by the institute, should be submitted with it first for review.
NFRA also holds that changes to the Standard on Auditing 220 (SA220), announced by the institute as part of its issuance of SQMs this month, suggests the two can’t be viewed separately.
The ICAI, however, argues that the “consequential changes” to the SA220 are a natural fallout of the introduction of the SQMs that cover auditing as well, in addition to other services.
The extant Engagement and Quality Control/Quality Management Standards clearly identify the standard of auditing as one of the six broad categories of standards, including SQMs, said a third person aware of the ICAI deliberations. “So there are distinctions already made between SQMs and auditing standards.”
‘Different standards’
In its response to ET, the institute cited the Companies Act, 2013, to say that the Engagement and Quality Control and Quality Management Standards comprise a total of 47 standards, 35 of which cover auditing standards that come under NFRA.
The remaining 12 standards—consisting of SQMs, standards on specialised areas, review engagements, assurance engagements and related services—come under the ICAI’s remit, it said. Before NFRA’s inception in 2018, the ICAI used to firm up even auditing standards for all companies.
The legal angle
Section 143 (10) of the Companies Act empowers the government to “prescribe the standards of auditing or any addendum thereto, as recommended” by the ICAI, in “consultation with and after examination of the recommendations” by NFRA.
However, it adds a proviso that “until any auditing standards are notified, any standard or standards of auditing specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing standards”.
[The Economic Times]
