Does the quality of work produced by accounting firms correlate with their size? Many studies in the past along with anecdotal evidence seem to suggest that small public accounting firms generally tend to perform lower quality accounting work than their larger counterparts. This is an understandable conclusion as the smaller firms tend to compete more on the basis of price. Consequently, they have less 'fat' in which to absorb costs and maintain an extensive suite of policies and procedures to ensure quality output occurs.
While such findings are debatable, there is still a need for small accounting firms to identify specific problem areas where quality can be compromised, and investigate possible solutions to ensure the highest possible image of professionalism and competency is maintained, regardless of size.
Both the Institute of Chartered Accountants in Australia and CPA Australia point to the standard for quality control APES 320 Quality Control for Firms, which provides detailed guidance on this subject. Where previous quality standards fell short in regards accommodating the special needs for small accounting firms, the current standard describes the approach to be taken in regards quality (i.e. it is not prescriptive). There are six areas that - at a minimum - must be covered in order to properly meet quality requirements.
1. Leadership Responsibility. Firms are required to establish policies and procedures that promote an internal culture that recognises that quality of work is essential in performing client engagements. Moreover, someone in the firm with sufficient authority must be allocated responsibility for overseeing the quality process. This is to make sure the system is not merely set up then left to its own devices, someone is actually making sure that quality is actually adhered to. However, the owners of the firm bear the ultimate responsibility for adherence to quality in the firm.
2. Ethical Requirements. The policies and procedures must also be able to give to the firm reasonable assurance that the firm and its' personnel comply with all relevant ethical requirements. The fundamental principles of professional ethics include integrity, objectivity, professional competence and due care, confidentiality, and professional behavior. The manual needs to contain measure to address threats to compliance with the fundamental principles.
A key aspect of the ethical requirements is that the owners must be able to have reasonable assurance that the firm and its personnel maintain professional independence where required. The firm must be able to identify and evaluate circumstances and relationships that may create threats to independence, and take appropriate action to mitigate the impacts, or withdraw from the engagement if the option is available under applicable law.
3. Client relationships and specific engagements. The key reason for nearly all accounting firms is the continuance of client relationships, and on occasion, accepting new engagements. As such, policies and procedures must be initiated such the firm is afforded reasonable assurance that the firm will only undertake or continue with relationships where criteria are met.
These criteria consist: is the firm competent to perform the engagement and has the capabilities, including time and resources; is able to comply/continue to comply with relevant ethical requirements, and; the firm has considered the integrity of the client and there is no evidence to the contrary to suggest that the client lacks integrity. Whilst the vast majority of clients will meet this criteria, occasionally one or two will fail the test, so these need to be weeded out. The risk to the firm of such clients cannot be emphasised enough.
4. Human resources. All accounting firms rely on having enough staff of sufficient competence to enable it to complete its engagements. Consequently, the firm needs to have policies and procedures that are designed to provide it with reasonable assurance that it has sufficient personnel with the competencies, capabilities and commitment to ethical principles to perform engagements in accordance with professional standards and applicable legal and regulatory requirements.
In addition to this, it is important for the firm to know the capabilities of its' staff so that it can deploy people accordingly: it comes back to the old concept of the work being done at the right level of employee, which is also useful as a training and development exercise.
5. Engagement performance. Accounting firms are required to establish policies and procedures such that it is afforded reasonable assurance that all engagements are performed in accordance with professional standards and applicable regulatory requirements. The policies need to address: the various matters relevant to promoting consistency in the quality of engagement work produced; supervision responsibilities (of junior staff), and; engagement review responsibilities.
From time to time, difficult and/or contentious matters will materialise within the firm, so the Quality Control Manual needs to address what happens when these arise, particularly that appropriate consultation takes place, and that sufficient resources are devoted to the matter to enable appropriate consultation to take place. Also, that the conclusion/s resulting from the consultations are properly implemented.
An essential feature of the quality system - engagement performance - is that of engagement documentation, and that working papers accurately support the final product, that engagement jobs are assembled in a timely manner and that reports are properly finalised. In addition, the safe custody, confidentiality and integrity of engagement documentation is properly maintained, and for a time span appropriate to the type of documents.
6. Monitoring. This is the last of the quality system requirements that a firm has to satisfy. The firms policies and procedures must be able to give it reasonable assurance that the system itself is relevant, adequate and operating effectively. This is done by periodically inspecting and evaluating the system itself and some of the output. Moreover, those who have been involved in producing the output should not be involved in inspecting engagements. Finally, that the responsibility for the monitoring process be assigned to a partner/s or someone with sufficient and appropriate authority in the firm
Conclusion
Its not the size of the firm that impacts the quality of work produced, but and individuals' professional attitude to their quality of work produced. There will always be a small minority of individual accountants who side-step quality for one or reason or another, but a commitment to quality - based on the quality standard - will help keep these individuals to a minimum.
About this Author
With more than twenty years in the fields of accounting and finance, sales and marketing, and operational activity, Michael (MK) has an extensive understanding how businesses succeed in a holistic manner.
He is also the Director of Insignia Consulting, accounting and business management consultants. Insignia Consulting has particular expertise, and specialises in The Quality Control Manual for Accounting Firms in Australia, with experience with QA Audits and developing customised manuals for public practice firms.
If you would like more information, please goto their page for the Quality Control Manual.
In addition, keep up to date with the latest accounting, tax (and some finance) news by visiting the Insignia Consulting Blog. There you will also find articles on the latest happenings and moves specifically relating to Quality Control in Accounting Firms.
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