Prime Minister Narendra Modi has repeatedly emphasized India's potential to develop home-grown professional services powerhouses-firms that can stand shoulder-to-shoulder with the global Big Four. His vision is clear: India should not only be a consumer of international audit and consulting brands but also a creator of globally respected Indian firms. Supporting this aspiration, the ICAI's shift to a risk-based quality management framework (SQM-1) lays the foundation for Indian audit firms to scale, build trust, and compete with global benchmarks.
Why SQM-1 Matters More Than Ever
The transition from SQC-1 (Standard on Quality Control) to SQM-1 (Standard on Quality Management) marks one of the most significant reforms in the Indian assurance landscape in recent years.
Under SQC-1, compliance was largely documentation-driven-quality manuals, HR policies, annual declarations, partner rotation, and periodic file reviews. These remain important, but under SQM-1 they serve only as a starting point.
SQM-1 requires a fundamental shift in mindset, from asking:
"Do we have a policy?"to"What could go wrong-and how do we prevent it?"
Where SQC-1 focused on six elements of quality control, SQM-1 expands this into eight components, adding:
- A firm-level risk assessment process
- Governance & leadership responsibilities
- Strengthened information & communication systems
- Detailed treatment of network risks and service providers
Additionally, SQM-1 mandates:
- Continuous monitoring,
- Root Cause Analysis (RCA), and
- A deeper, evidence-driven approach to quality.
The new standard is:Risk-linked • Leadership-driven • Tailored • Data-backed • Continuous • Root-cause focused
The standard prescribes that the SQM-1 is required to be designed and implemented by April 1, 2026 and the evaluation of the quality management is required to be performed within one year following April 1, 2026 which is by April 1, 2027.
Journey of Audit Firms: From SQC-1 to SQM-1
Under SQC-1, a typical mid-sized firm would maintain:
- A QC Manual (incl. HR Manual)
- Annual independence declarations
- Partner rotation compliance
- Regular file inspections
These remain relevant but are no longer sufficient.
SQM-1: What Now Changes
Firms are now expected to:
- Integrate quality considerations into the organization structure
- Set up a dedicated quality team with a partner who has time and authority
- Identify firm-specific quality risks
- Address network-related risks and services
- Conduct formal Root Cause Analyses
- Provide ongoing quality-related training
- Build systems to capture and escalate quality information
- Practice continuous monitoring rather than annual checks
Transformation Roadmap: From SQC-1 to SQM-1
Step 1: Establish Governance & Leadership Responsibilities
- Appoint a Quality Partner to ensure quality is never overshadowed by commercial pressures.
- Clearly assign roles for independence monitoring, RCA, inspections, and continuous monitoring.
Step 2: Define Quality Objectives
Start with the mandatory objectives prescribed by SQM-1 across governance, ethics, human resources, engagement performance, and monitoring.
Step 3: Identify & Assess Quality Risks
This is the heart of SQM-1. Firms must identify specific risks under each component, based on their size, industry mix, clients, staffing model, reliance on networks, and technology.
Step 4: Design Responses for Each Quality Risk
Responses must be tailored, not generic, and directly linked to identified risks.
Step 5: Strengthen Information & Communication Systems
This includes training, technical resources, secure documentation, and technology enablement.
Step 6: Implement Ongoing Monitoring
Monitoring should be continuous and responsive-not a year-end activity.
Step 7: Perform Root Cause Analysis
Move beyond symptoms to address underlying causes-culture, training gaps, planning issues, supervision lapses, or resource constraints.
Step 8: Conduct the Annual Evaluation
Leadership must annually evaluate whether the system of quality management is functioning effectively.
A Thoughtful Consideration
As firms embark on this transition, the journey may feel complex-but also immensely rewarding. SQM-1 is an opportunity to strengthen internal systems, elevate audit quality, and align with the nation's vision of building globally respected Indian professional firms.
If you or your organisation is reflecting on how best to navigate this shift, we are always open to sharing perspectives, discussing practical approaches, and contributing to the broader conversation on quality-whenever such dialogue may be helpful.
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