ICAI can't notify audit quality norms, says SG Tushar Mehta
Dec 30, 2024
Synopsis
The ICAI is not authorized to issue standards on quality management or amend audit norms for accountancy firms. This responsibility lies with the government, as per the solicitor general's opinion. The dispute arose after ICAI issued new standards and audit changes, which NFRA considered illegal. The matter aligns with aligning domestic audit norms with global standards.
The Institute of Chartered Accountants of India (ICAI) doesn’t have the power to issue standards on quality management (SQMs) for accountancy firms or introduce consequential changes to audit norms, solicitor general of India Tushar Mehta said in an opinion sought by the National Financial Reporting Authority (NFRA).
The opinion bolsters the NFRA’s stance that the institute, apart from being unable to issue audit norms, can’t issue SQMs either on its own. These have to be notified by the government, a senior NFRA official said.
In a 24-page communication to the NFRA last month, reviewed by ET, the solicitor general (SG) said: “The ICAI cannot continue to issue and notify SQMs and consequent amendments to SAs (standards of auditing) or issue amendments to other SAs by citing its powers under the proviso to Section 143(10) (of the Companies Act) as the said power is only transitory in nature.”
The solicitor general’s opinion was sought after the ICAI issued two new quality management standards — SQM1 and SQM2 — and introduced 16 consequential changes in auditing norms for accountancy firms on October 14, a move that the NFRA deemed illegal.
The ICAI action escalated a regulatory tussle that started over the NFRA’s bid to align domestic audit standards with global ones earlier this year.
Legal position
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 the NFRA.
However, it adds a proviso that “until any auditing standards are notified, any standard or standards of auditing specified by the ICAI shall be deemed to be the auditing standards.”
Before the NFRA came into being in 2018 after being constituted by the government to recommend auditing standards, among other functions, the ICAI used to set these norms for all companies.
Only the government has the authority to notify all audit standards, Mehta underscored. He also said the NFRA has power “to make independent recommendations to the central government on accounting and auditing standards.”
In response to ET’s queries, the institute said: “If the government, on the recommendation of NFRA, notifies SQM 1 and SQM 2 as auditing standards under Section 143(10), the ICAI will fully abide by such a notification. However in the views of ICAI, SQM 1 and 2 are frameworks for quality management at the (accountancy) firm level, providing essential standard operating procedures for firms and are not auditing standards.”
Following the NFRA’s objection to the institute’s issuance of SQMs in October, the ICAI had written to the corporate affairs ministry, defending its move.
SQMs, the institute had maintained, covered all services rendered by accountancy firms, going well beyond just auditing, and were, therefore, distinct from auditing standards. That gave it the right to issue them without the NFRA’s clearance, the ICAI had said earlier.
Subsequently in November, the NFRA made minor changes to the SQMs already issued by the institute and referred them to the government for its consideration and notification.
To the NFRA’s query as to whether Standards on Quality Control (SQCs) and SQMs can be considered auditing standards, the solicitor general said it’s for the government to decide.
Mehta also held that the NFRA has the power to “levy a penalty both on the firm and the individual CA (chartered accountant) where professional or other misconduct is proved.”
Similarly, the audit watchdog can issue general circulars to companies and auditors of companies under its purview to ensure they strictly comply with audit norms.
[The Economic Times]
