The CA Institute has said that its newly-issued audit firm quality management standards do not fall within the definition of “auditing standards”. 

These two standards —SQM 1 and SQM 2 — issued on October 14 are outside the purview of Section 143 (10) of the Companies Act, 2013, sources in the CA Institute said.

This provision in company law stipulates that only the Centre can issue auditing standards in the country.

The Institute of Chartered Accountants of India (ICAI) has taken the position that it is well within its legal mandate to issue the new Standards on Quality Control as part of its efforts to align the Indian framework with the global standards, issued by the International Auditing and Assurance Standards Board (IAASB). 

However, the National Financial Reporting Authority (NFRA), sole independent audit regulator, has reportedly contended that ICAI has acted “illegally” and breached existing norms by issuing the standards on its own without taking former’s consent for the changes and then sending it to Centre for its approval. The matter may now land up before corporate affairs ministry (MCA) for resolution, sources said.

Story so far 

ICAI had issued the extant Standard on Quality Control (SQC) 1, “Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements” in October 2007. 

SQC 1 is effective for all engagements relating to accounting periods beginning on or after April 1, 2009. 

SQC 1 is effective as on date and applies to all audit firms for all their services and is mandatory. 

The ICAI said that regular updates revises the existing standards to ensure alignment with standards issued by the IAASB. 

ICAI issued SQM 1 and SQM 2 on October 14, 2024. 

The new SQMs — namely, 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 were approved by the Council of ICAI in January.

These standards are to be implemented on a recommendatory basis by April 1, 2025 and will become mandatory by April 1, 2026. SQM 1 and SQM 2 will replace the extant SQC 1 once they take effect. 

“As per Section 143(10) of the Companies Act, 2013, auditing standards are required to be notified by the Central Government. SQM 1 and SQM 2 do not fall within the definition of auditing standards. So, SQM 1 and SQM 2 are outside the purview of Section 143(10) of the Companies Act, 2013”, sources said.

It is important to note that only the “auditing standards” are covered in the purview of Section 143(10). Whereas SQM 1 and SQM 2 are quality management standards. SQM 1 and SQM 2 apply at the firm’s level for all services rendered by firms. 

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, they added.

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