ICAI New Audit Quality Management Standards are Void and Illegal: NFRA
According to NFRA sources, without government approval, practising Chartered Accountants (CAs) may find themselves compelled to disregard these standards, further complicating the auditing landscape in India
ICAI – Chartered Accountants – NFRA – ICAI audit – ICAI new audit – TAXSCAN
ICAI – Chartered Accountants – NFRA – ICAI audit – ICAI new audit – TAXSCAN
In a significant development, the National Financial Reporting Authority ( NFRA ) has declared the recent revisions made by the Institute of Chartered Accountants of India ( ICAI ) to its auditing standards as “illegal.” The NFRA, which includes members from key regulatory bodies such as SEBI, CAG, and RBI, criticising that the Standards of Quality Management ( SQMs ) must be formally notified as auditing standards backed by legal authority, a stance the ICAI disputes, asserting that SQMs do not constitute auditing standards.
The Institute of Chartered Accountants of India ( ICAI ) had earlier issued two new standards, SQM 1 (Standard on Quality Management) and SQM 2, along with a revised SA 220 (Standard on Auditing).
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SQM 1 outlines a firm’s responsibility to establish policies and procedures for quality management across all engagements, including audits, reviews of financial statements, and other assurance services and applies to all firms performing audits, financial statement reviews, or assurance services, requiring a quality management system for consistent engagement performance.
SQM 2 focuses on the appointment and qualifications of the engagement quality reviewer, as well as the review process and its documentation and also governs engagements needing an engagement quality review, based on SQM 1 compliance, and must align with ethical standards.
Read More: ICAI issues SQM 1, SQM 2 and Revised SA 220 Introducing New Quality Management Standards
The ICAI released the updated SQMs along with a series of related Standards on Auditing (SAs) earlier this week. An NFRA source, speaking on condition of anonymity, stated ICAI lacks the authority to alter auditing standards. According to the Ministry of Corporate Affairs (MCA), any amendments to standards must be reviewed by the NFRA prior to implementation. Their recent changes were made without our consultation, rendering them illegal and void ab initio.”
In August 2021, the MCA had instructed the ICAI to consult with the NFRA under Section 143(10) of the Companies Act before issuing new audit standards. The NFRA is now poised to escalate the matter to the government, as the ICAI's actions are perceived as a disregard for the established protocol.
While the revisions to SQMs were seen as necessary to reflect new audit practices and enhance risk assessment, the process has raised serious concerns about compliance and regulatory oversight. The NFRA board maintains that any changes must be examined thoroughly, and they plan to conduct a fresh review of the revised SQMs in their upcoming board meeting in November.
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The ICAI previously indicated a commitment to share the draft of the SQMs with the NFRA, requesting three weeks to do so. However, the recent release of the SQMs without prior consultation has led to allegations of non-compliance with government directives.
ICAI’s SQM1 is set to take effect in April 2025, while SQM2 is slated for implementation in April 2026.
The ongoing situation raises critical questions about the governance and regulation of auditing practices in India, pointing at the dire need for clear communication and adherence to established protocols between the ICAI and regulatory bodies like the NFRA.
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