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Dec 1990

Upgrading your quality control system.

by Mancuso, Anthony J.

    Abstract- CPA firms should evaluate and upgrade their quality control systems. The most cost-effective quality control systems are those that are customized. The issues to consider when evaluating a quality control system include the complexity of the system, the documentation, and the mistakes made by other firms. The steps involved in upgrading a quality control system include obtaining expertise in evaluation techniques, evaluating the existing system, implementing revisions, evaluating the results, and making final revisions.

Now is the Time

If your firm has not yet had such a review, now is the time to evaluate your existing system and consider upgrades that make sense. This will enable you to pass your review with flying colors. All that may be required is an expansion of the documentation of your existing system.

Customized = Cost Effective

The best and most cost-beneficial quality control system is one that is customized to meet the unique needs of your practice. As you evaluate your system, a number of decisions will have to be made, some in response to the AICPA's programs and others dictated by common sense. To evaluate the system, you should:

* Stop and think about your unique situation;

* Develop a design and implementation timetable; and

* Implement the enhancements or procedures required.

The quality control system need not be formal. Statement on Quality Control Standards No. 1 (SQCS 1) issued by the AICPA requires that your quality control system be appropriately comprehensive and suitably designed for the nature of your practice.

The quality control system must provide reasonable assurance that your firm complies with the standards of quality control. SQCS 1 requires that a firm:

* Establish policies and procedures for each of the nine elements of quality control;

* Effectively and timely communicate these policies and procedures to personnel; and

* Monitor the effectiveness of policies and procedures.

Because of the way SQCS 1 is written, firms have a great deal of latitude in the design of the system: it should be customized to fit the individual firm's needs. Therefore, when evaluating your present system, consider the following questions:

1. What are the nine elements of a quality control system and bow do they apply to our practice? The nine elements of quality control are as follows:

1. Independence;

2. Assigning personnel to engagements;

3. Consultation;

4. Supervision;

5. Hiring;

6. Professional development;

7. Advancement;

8. Acceptance and continuation of clients; and

9. Inspection.

The AICPA Quality Review Program requires only a minimal formal quality control system for firms with 10 or fewer professionals. Thus, a Quality Review in such a case will ordinarily focus on only the first four of the nine elements. However, all nine elements must be addressed in your system, regardless of your firm's size.

2. How complex a system does my firm need? The system of quality control for a firm with a local practice will be quite different than the system of a national or regional firm. Less obviously, your system will not even be exactly the same as that of your closest competitor. SQCS 1 fully recognizes that the "nature and extent of a firm's quality control policies and procedures depend on a number of factors."

* Firm size. The smaller the firm, the closer the partners, if any, are likely to be to its daily operations and decision making process. Conversely, larger firms tend to be more decentralized and will therefore need more explicit and formal policies and procedures.

* Nature of practice. If a practice is primarily audit engagement oriented, its needs will differ from those of a firm that generally issues only compilation reports. Similarly, if you have clients in specialized industries, your requirements must be responsive to this part of your practice.

* Organizational structure. If a firm's decision making process rests principally with one person, or with a small group of people that work closely together, its quality control system can be less structured and require a lower level of documentation than might otherwise be considered necessary.

* Number and location of offices. if a firm has several offices, it will need a more comprehensive set of policies and procedures-- particularly if the offices are far apart--than a similarly sized firm that operates from one office.

Table 1 sets forth the factors that typically impact the complexity and scope of a quality control system.

3. What should be in writing? A quality control document is a written summary of the quality control system. Standards do not require that a firm have a quality control document. However, at a minimum, in preparation for a Quality or Peer Review, you will be required to prepare answers to a questionnaire that will briefly describe the elements of your quality control system. However, the preparation of a quality control document, in whole or in part helps put the pieces together into a good overall system that will increase efficiency and will be one in which you can take pride.

4. Who is going to coordinate and enforce your efforts? A quality control system works best when the top people in a firm demonstrate a genuine commitment to developing, implementing, and following the system. Centralized responsibility and clear communication to professionals are essential for success. It is important for staff to know who has authority for, and can answer questions about your quality control program. Accordingly, one person, preferably a partner, should be placed in charge of quality control and that person should be given the authority to carry out the responsibility.

5. What can you learn from other firms' mistakes? Knowing what to avoid will help in evaluating your quality control system. Most deficiencies found in actual Quality and Peer Reviews have been in the supervision area and often relate to the sufficiency of documentation in support of procedures performed in complying with GAAS.

Preparing for Your Quality Review

A quality review encompasses the quality control system in effect and the engagements performed during a one-year period. What if you do not have time to have the improved system ready for the period to be reviewed? This situation will probably not be unusual in the early years of the quality review program. It is therefore quite possible that some engagements reviewed will have been done under the old system and some will have been done under the new. The emphasis by the reviewer will be on whether the engagements were conducted in accordance with professional standards, not which system was followed.

Five Steps to Designing and Implementing Improvements to the System

1. Gather the Necessary Information and Expertise Gather any written policies and procedures that you already have; you may discover there are more than you realize. If you use checklists and forms, or write memoranda to your staff about administrative or procedural matters, include them in the database that you are creating. The end result will be the determination of which areas are already covered by some sort of written policies and procedures and a summary of what elements are missing.

Be sure to read the authoritative AICPA pronouncements that apply to your practice, including:

* SQCS 1;

* Interpretations of SQCS No. 1;

* Quality Control Policies and Procedures for CPA Firms; and

* Standards for Performing and Reporting on Quality Reviews.

Many CPA firms are finding that their personnel have neither the time nor the expertise to evaluate the firm's needs and design the necessary improvements to the system. In this situation it may be advisable to engage an outside consultant.

Also consider enrolling in CPE courses offered by the AICPA and your state CPA society. Self-study materials are also available.

There are subscription services and manuals being offered by some publishers that can be of assistance.

2. Evaluate What You Have and Develop Revisions. Compare your existing policies and procedures to the minimum documentation requirements and actual needs of your firm. The AICPA questionnaire referred to earlier can be a valuable tool in determining what is missing. Prepare an outline of the general policies and procedures that you believe are necessary to a satisfactory quality control system for your practice. Again, turn to the AICPA questionnaire and use that document to record the procedures that you must add to make your system complete. Supplement the questionnaire with memos and other documentation as appropriate.

3. Implement the Revisions to Your Policies and Procedures Implementation will be mostly a matter of motivating your staff by communicating and demonstrating to them the benefits of a good quality control system. Or, you may wish to formalize all the written materials into a quality control document.

It is a good idea to conduct one or more staff meetings and training programs to explain to your staff what the system is, the benefits of complying with the system, and that the firm is committed to quality in its practice.

Each member of the professional staff should have a reference copy of the quality control document, if you have one, or any formalized quality control materials that you require your staff to use to document compliance. This would include checklists and other forms that must be completed for accounting and auditing engagements.

4. Inspect and Analyze the Results As the firm begins to operate under the revised system, you must watch over it closely. SQCS I and related authoritative interpretations require an annual inspection; you must review completed engagements and other documentation completed over a period of time to ascertain whether your firm is effectively applying your quality control policies and procedures.

The inspection can be accomplished in several ways:

* Have partners and staff of the firm do the inspection;

* Have a cross-inspection with another comparably sized firm; or

* Hire an outside consultant or another CPA firm.

5. Revise and Finalize Your System After you have inspected the results of operating under the upgraded system and analyzed the results, consider whether additional modifications are warranted to correct deficiencies noted or streamline the process.

You may find there are redundancies in the system or procedures that just are not effective and should be eliminated.

Confidential, "no-risk" consulting reviews are available through the AICPA or your state CPA society to help you assess your quality control system and your readiness for review. In a consulting review, an experienced reviewer examines your quality control system and looks at selected workpapers and financial statements in order to help pinpoint areas for improvement. Only oral suggestions are made; there is no written report. You cannot fail a consulting review ! An outside consultant will provide you with a customized equivalent of a consulting review. Frequently, a consultant is hired on a contract or hourly basis to help CPA firms design or revise their quality control system.

If you have not already done so, now is the time to upgrade your quality control system. Put on your thinking cap, develop a timetable, and implement your procedures so that you can assure yourself of passing your quality or peer review.



















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