A recent opinion provided by the Solicitor General of India to the National Financial Reporting Authority (NFRA) has clarified that the authority to issue binding standards or guidelines for audit lies exclusively with the government, specifically the Ministry of Corporate Affairs (MCA). This legal opinion clarifies that neither the NFRA nor the Institute of Chartered Accountants of India (ICAI) has the power to independently set enforceable standards. According to the opinion, the ICAI can only make recommendations, which are subject to government approval.

It further stated that ICAI cannot take direct action against audit firms, limiting its jurisdiction to Chartered Accountants (CAs) alone. This interpretation comes amidst ongoing discussions surrounding proposed revisions to auditing standards, including Standards on Auditing (SAs) 600 and 299, which pertain to group and joint audits, respectively. Get a Copy of Achieve Success: Expert-Led Courses for Tax and Finance Pros, Click here The NFRA had recently recommended revisions to 40 auditing standards, eliciting strong opposition from the ICAI.

The ICAI contended that these standards, if implemented, would disproportionately impact smaller firms and result in duplicative work. However, NFRA sources argue that while the proposed standards directly pertain to quality management, their indirect impact would alter existing auditing practices—a change that only the MCA is authorised to mandate. The legal clarification was sought following the introduction of the Standard of Quality Management (SQM) 1 and 2 by the ICAI last month. These standards aim to provide operational guidance and standard operating procedures (SOPs) for audit firms, for smoother quality management processes rather than directly redefining audit standards. Experts suggest this development could redefine the dynamics between regulatory bodies like the ICAI and NFRA and their relationship with the MCA, reaffirming the role as the final arbiter in determination of the nation’s audit and accounting standards.

Get a Copy of Achieve Success: Expert-Led Courses for Tax and Finance Pros, Click here With the government holding the decisive power, the NFRA and ICAI are now positioned as advisory bodies whose recommendations may shape the framework but cannot unilaterally impose regulations. This clarification ensures that any significant changes to the auditing and accounting landscape will undergo formal government processes rather than authorities without actual powers issuing guidelines and standards. As this debate continues, stakeholders are closely watching the MCA’s next steps to see how the recommendations will impact the auditing profession, particularly smaller firms.