NFRA gets legal opinion on ICAI's powers to issue audit standards

'Only govt can take final call on audit standards'

The Solicitor General of India, in an opinion provided to the National Financial Reporting Authority (NFRA), said the Institute of Chartered Accountant of India (ICAI) does not have the power to issue any binding standards or guidelines for audit, according to people in the know.

 

It can also not take action against any audit firm but only Chartered Accountants, sources said.

 

The authority to issue any standards regarding audit and accounting vests only with the government and in this case the Ministry of Corporate Affairs (MCA).  “Neither NFRA nor ICAI have the power to issue binding standards of audit. They can only make recommendations to the government who can then take the final call to accept or reject those suggestions,” the source said.

 

The legal opinion was sought in reference to the Standard of Quality Management 1 and 2 (SQM) that was brought by the Institute last month. ICAI sources however have held that the said standards are related to quality management and not audit standards, at firm level providing them SoPs and guidance for smooth functioning and quality management. 

 

Sources said that while directly the standards don’t relate to audit but indirectly they would end up altering them and this can be done only by MCA. A NFRA source said that the Authority considers SQM to be audit standards.

 

The revision in SQM 1 and SQM 2 were approved by the NFRA to be recommended to MCA for notification in its board meeting held earlier this week along with 39 other audit standards.

 

As for disciplinary proceedings as defined under Section 2(ca) of the Chartered Accountants Act, 1949, firms are not members of the ICAI and disciplinary Proceedings can only be initiated against the members of the ICAI. As per Sections 21A(3) and 21B(3) of the Act if a member is found guilty of professional misconduct they may either be reprimanded, their name be removed from the register of members or be imposed with fine.

 

The new SQMs - SQM 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements, and SQM 2, Engagement Quality Reviews—apply to all audit firms, regardless of the specific services they provide.

 

“These standards are designed to provide guidance for consistent quality management across the spectrum of services offered by the firms, enhancing the overall reliability and credibility of their work,” ICAI source said.

 

Section 143(10) of the Companies Act, 2013, refers to “auditing standards” that are required to be notified by the central government. 

In a nutshell

  > NFRA recommended revision in 40 standards on auditing (SA), including the SA 600 and SA 299, which deal with group and joint audit, respectively

> ICAI opposed those standards on grounds that they will affect smaller firms and duplicate work

> NFRA sources believe that while directly the standards don’t relate to audit but indirectly they would end up altering them, which can only be done by the MCA