Around most CPA firms’ watercoolers very little chatter is going on about the AICPA’s Statement on Quality Control Standards (SQCS) No. 7, A Firm’s System of Quality Control. Yet this standard — issued in October 2007 and effective January 1, 2009 — requires all firms with A&A practices to “put their money where their mouth is” when it comes to audit quality.

While firms differ in size, complexity, type of clients and range of services, there are certain principles of quality control (QC) that are universal. SQCS 7 supersedes and replaces all of the previously effective QC standards and applies to any practice that performs audits, reviews, compilations or other services covered by Rules 201 or 202 of the AICPA Code of Professional Conduct.

SQCS 7 strongly emphasizes the responsibility of firm leadership to set the proper “tone at the top,” conveying through words and actions that quality work is of paramount importance. Each firm is required to design and implement QC policies and procedures that support that message and promote a quality-oriented culture.

Special emphasis is placed on aligning the firm’s business strategy with its quality orientation. To that end, the QC system must include policies that “assign management responsibilities so that commercial considerations do not override the quality of the work performed.” A firm’s systems of performance evaluation, compensation and benefits and advancement of its people should demonstrably reinforce the commitment of firm leadership to quality. Practically, this means each firm needs to invest sufficient time and money in developing, communicating and supporting its QC policies and procedures. Individuals responsible for leading the firm’s QC efforts should possess sufficient and appropriate ability and experience to identify and understand QC issues and develop appropriate QC policies and procedures. Perhaps most importantly, QC leaders should possess the necessary authority to implement those policies and procedures and to ensure that others within the firm will not override those policies to meet short-term financial goals.

The following comparison of SQCS 7 to the previous standard further illustrates the “tone-at-the-top” emphasis:
Elements of a System of Quality Control for a Firm’s A&A Practice

Leadership responsibilities in the context of the standard, do not refer exclusively to those who lead the QC function. Rather, the tone set by upper management — including the level of responsibility, authority and respect it shows for those that lead the QC function — sends a strong message to others in the firm regarding how committed the firm is to quality practice.

One of the important requirements of SQCS 7 relates to policies for QC reviews of certain engagements. Each firm should establish criteria to evaluate whether a particular engagement should be subjected to an engagement QC review by an objective, non-participatory reviewer. Unless a firm’s size constraints prevent it, the engagement QC reviewer should not be selected by the engagement partner. An effective quality control review can go a long way toward improving the quality of the audit process. Some of the other requirements of SQCS 7 that may require firms to change their current systems and policies are as follows:

• Formally document the firm’s system of QC in a manner appropriate to the firm’s size, structure and the nature of its practice
• Communicate the firm’s QC policies and procedures to its people, preferably in writing
• Ensure that the firm communicates all applicable independence requirements to personnel to which they apply
• Implement appropriate safeguards to identify and mitigate threats to the firm’s independence
• At least annually, obtain written confirmation of compliance with the firm’s policies and procedures on independence (as well as applicable rules of state boards of accountancy and any regulatory agencies) from personnel to whom the requirements are applicable
• Before agreeing to perform any specific engagement, the firm must ensure that it has the capabilities and resources to do so (including sufficient personnel with necessary skills and competence) within the reporting deadline.

Successful implementation of SQCS 7 will require a firm’s full attention. With less than six months left until implementation, maybe the watercooler should be getting busier!

From the accounting and auditing specialists at AuditWatch, part of the CPE & Training Solutions available from the Tax & Accounting business of Thomson Reuters. Copyright © July 2008. To see more about AuditWatch, visit trainingcpe.thomson.com/AuditWatch.