Proposed Quality Management Standards Will Affect Every Firm With an Accounting and Auditing Practice
The American Institute of CPAs’ (AICPA) Auditing Standards Board (ASB) has issued the exposure draft (ED), Proposed Quality Management Standards (QM), that includes three interrelated standards which address the way CPA firms manage quality for their accounting and auditing practices. The standards are intended to offer a new proactive, risk-based approach to effective quality management systems within CPA firms, which will improve the scalability of the standards and promote a system tailored to the firm and its engagements.
There are several changes in these standards that are potentially significant to a firm’s accounting and auditing (A&A) practice. Smaller firms including sole practitioners likely will be impacted significantly as the ED is currently written. Two changes that smaller firms should focus on, because of the potential significant impact, are as follows:
Current quality standards do not prohibit individuals associated with an engagement or who perform the engagement quality control review (EQCR) on an engagement to also inspect the engagement as part of the firm’s annual monitoring process. Under the proposed QM standards, self-inspection will not be allowed. Smaller firms with fewer individuals available and capable of performing the monitoring procedures may be required to engage individuals outside their firms to perform their annual inspections.
- Cooling-Off Period for Engagement Quality Reviewers
Current QC standards do not require a “cooling-off period” when an engagement partner rotates off an engagement before that partner is eligible to perform the EQCR for that same engagement provided he or she otherwise qualifies. The ASB indicates in the ED that the rotating partner may not be objective in reviewing and evaluating significant judgements when that individual was previously involved in those judgements and requires a two-year cooling-off period. Smaller firms may find that they will need to look outside of their firm for a qualified individual to perform a Quality Review (EQCR) of an engagement during the cooling off period.
Overall Summary of ED
The ED will align with International Auditing and Assurance Standards Board’s (IAASB) quality management standards.
The proposed standards would supersede Statement on Quality Control Standards No. 8, create a new QM section in AICPA Professional Standards and supersede SAS No. 122, as amended, section 220, Quality Control for an Engagement Conducted in Accordance with Generally Accepted Auditing Standards.
The key changes from existing standards are as follows:
- New risk-based approach focused on quality management
- Revised components of the system of quality management
- New risk assessment process
- More robust leadership and governance requirements
- Enhanced monitoring and remediation process
- New requirements for networks and service providers
MSCPA Responds to ED
All firms, regardless of size will be impacted. MSCPA encouraged firms to read the ED and provide comments by the ASB deadline, August 31, 2021. MSCPA also sent a response which included comments from members and firms. Our response focused on the adverse effect on small firms’ livelihoods, their clients, and the future of the profession.