The National Financial Reporting Authority (NFRA) was constituted on 01st October, 2018 by the Government of India under Sub Section (1) of section 132 of the Companies Act, 2013.
Functions and Duties as per Sub Section (2) of Section 132 of the Companies Act, 2013, the duties of the NFRA are to:
- Recommend accounting and auditing policies and standards to be adopted by companies for approval by the Central Government;
- Monitor and enforce compliance with accounting and auditing standards;
- Oversee the quality of service of the profession associated with ensuring compliance with such standards and suggest measures for improvement in the quality of service;
Is ICAI Authorized to issue standards on quality management??
ICAI for the purpose of shifting focus from “Quality control” to “Quality management” introduced SQM-1 and SQM-2 (Standards on quality management) on 14th October, 2024 claiming it to be a proactive approach. It claimed that these standards are not part of standards on auditing and issued to ensure quality managements of engagements performed at the firms level, on the objection being raised by NFRA that standards on Auditing cannot be issued without its recommendation.
Need Of SQMs and how it is different from Present standards on quality control SQC-1 and SA-220??
SQM-1: Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Service Engagements.
- Requires the firms to ensure Quality management system in all engagements performed
- Create environment that supports the firm to ensure that Quality management being followed
SQM-2: Engagement Quality Reviews
- Eligibility and Appointment of Engagement Quality Reviewer (EQR)
- Documentation by EQR
The new standard SQM-2 emphasis on importance of Engagement Quality Review and SQM-1 covers the scope of engagements subject to Quality review. Presently provisions regarding EQR resides in SQC-1 and SA-220, which will now be replaced by more extensive standard i.e. SQM-2.
These more clearly differentiates responsibility of Firms and EQR.
NFRA’s Concern
NFRA is of the view that ICAI acted illegally and it cannot issue standards without approval from Central government.
In 18th meeting was which held in November, 2024 NFRA recommended these quality management standards with minor changes as these are in line with global standards.
These will be effective from 1st April, 2026 on approval of central government. However as per the ICAI sources AASB after following its due process of forming standard finalized the standards which were later approved by ICAI. Now, these standards are recommendatory from 1st April, 2025 and Mandatory from 1st April, 2026 replacing SQC-1.
