ICAI lacks authority on audit standards; MCA can nullify SQMs: ex-NFRA chief Rangachari Sridharan
As ICAI introduces new Standards of Quality Management (SQM), observations have been expressed by experts regarding its legitimacy and adherence to established protocols. Rangachari Sridharan, Ex- Chief, NFRA, asserts that legally valid auditing standards can only be issued by the Ministry of Corporate Affairs, a position that challenges the ICAI's recent unilateral actions, without prior consultation with the NFRA. Legally valid and enforceable auditing standards are only those issued as rules by MCA on behalf of the Government of India.
Sridharan highlighted that standards not formally issued by the Government of India lack enforceability. He explained that the proper process for establishing accounting standards requires the ICAI to propose drafts to the NFRA, which reviews and recommends them to the government before they can be issued as rules under the Companies Act.
The ICAI recently released new Standards of Quality Management (SQM), which establish quality standards for Chartered Accountants and audit firms. SQM 1 mandates that firms implement policies and procedures for quality management across all engagements, including audits and reviews of financial statements. It applies to all firms performing audits, requiring a robust quality management system for consistent performance.
Meanwhile, SQM 2 focuses on the qualifications of the engagement quality reviewer, along with the review process and its documentation. It governs engagements requiring an engagement quality review based on compliance with SQM 1 and must align with ethical standards.
