SQMS No. 1: First steps
Implementing the new Statement on Quality Management Standards requires a plan
October/November 2022 Footnote
Editor's note: Updated September 30, 2022
It’s not often that a new standard affects every firm with an accounting and auditing (A&A) practice.
The bold type is on purpose, because a suite of standards approved in May 2022 by the AICPA Auditing Standards Board (ASB) includes one — Statement on Quality Management Standards No. 1, A Firm’s System of Quality Management — that applies to all firms that perform any engagement included in a firm’s A&A practice.
SQMS No. 1, when effective, will supersede Statement on Quality Control (SQCS) No. 8, A Firm’s System of Quality Control, which can be found in Professional Standards QC Section 10. By Dec. 15, 2025, firms with an A&A practice will need to be in compliance with the new standard.
SQMS No. 1 deals with a firm’s responsibilities to design, implement and operate a system of quality management for its accounting and auditing practice. Notice the change from “quality control” to “quality management,” which is meant to communicate that the process of achieving quality is an ongoing, collaborative and evolving process, responsive to changes in the nature and circumstances of the firm and its engagements.
A system of quality management addresses eight components:
- The firm’s risk assessment process.
- Governance and leadership.
- Relevant ethical requirements.
- Acceptance and continuance of client relationships and specific engagements.
- Engagement performance.
- Information and communication.
- The monitoring and remediation process.
The components should look familiar because they are similar to the components under SQCS No. 8. But several have been tweaked, and two are new in entirety: the firm’s risk assessment process, and information and communication.
What else is different from current standards?
At the heart of SQMS No. 1 is a risk-based approach that calls for the firm to do the following:
- Establish quality objectives. These are detailed in the standard, but a firm may add more if they deem necessary.
- Identify and assess risks to the achievement of quality objectives (quality risks). What are the conditions, events, circumstances, etc. that could reasonably occur that may adversely affect the firm’s ability to achieve the quality objectives?
- Design and implement responses to quality risks. A few responses are specified in the standard, but most will be up to a firm to determine based on their situation. This risk-based approach will require a thoughtful and honest look at the firm’s structure, financial incentives, employees and areas of competence, industries in which the firms perform engagements and its client base. This is not one-size-fits-all, meaning customization is necessary. But the good news is that it’s scalable; the risks and responses will increase as complexity increases. A firm that performs a single type of engagement for a single type of client in a single industry will have fewer risks than a firm of the same size performing multiple types of engagements across multiple industries.
- More robust leadership and governance requirements. The managing partner or governing board holds the ultimate responsibility for quality; there’s a focus on a firm culture that demonstrates a commitment to quality.
- Enhanced monitoring and remediation process. The whole system is required to be evaluated at least annually, and the responses to quality risks adjusted as needed. This never stops.
How does a firm start redesigning an entire system?
More good news: There’s time. The deadline for a new system to be in place is Dec. 15. 2025. Guidance and practice aids are expected to be released in the spring 2023. But until then, there are two key things a firm can do:
- Get acquainted with the standard. The standard itself is just 61 paragraphs — 19 pages of an 80-page PDF document. The 228 paragraphs that follow the standard are application material to help understand and implement the standard. Start with those 61 paragraphs.
- Decide who will lead the charge. Implementation of the standard needs a champion. A person in a top leadership position should have some level of involvement, but an experienced staff person may see an opportunity to develop their skills in taking on a unique project. Sole proprietors who can’t delegate this task may find value in discussions with other individuals like themselves.
- Educate yourself. Most CPAs will benefit from multiple occasions to learn about the standard. It’s not too early to start (bit.ly/3eSKE0x).
As those in charge of implementation get comfortable with the standard, they can begin the process of assessing the quality risks facing the firm for each of the quality objectives and identifying current responses already in place. Where are the gaps, and how can they be addressed?
Take a positive approach to implementation.
Successfully implementing SQMS No. 1 starts with an open mindset: There is value to be found here.
Recognize that this standard is not about checking boxes or printing out a template; it’s about authentically assessing the threats to quality firms face and developing policies and procedures to minimize them.
Bookmark the MNCPA SQMS Resources page
This resources page will be continuously updated leading to the Dec. 15, 2025, implementation dates for the new quality management standards.
Related standards recently issued:
SQMS No. 2, Engagement Quality Reviews
SAS No. 146, Quality Management for an Engagement Conducted in Accordance with Generally Accepted Auditing Standards
SSARS No. 26, Quality Management for an Engagement Conducted in Accordance with Statements on Standards for Accounting and Review Services