Auditing Standards Board approves significant changes in firm quality standards
May 13, 2022 | Faye Hayhurst, CPA
One of the most talked about standards proposals in recent memory has been finalized. On May 12, 2022, the Auditing Standards Board (ASB)
approved the most significant change to quality control standards affecting a CPA firm’s accounting and auditing practice since 2006.
Approved were the following standards (collectively, the QM standards):
SQMS No. 1 supersedes Statements on Quality Control Standards (SQCS) No. 8 and represents a move toward a risk-based approach to achieving quality objectives, where firms need to evaluate the risks that may have an impact on engagement quality and develop appropriate responses to address those risks.
The QM standards provide substantial enhancements to the responsibility of firm leadership for proactively managing quality. This is no one-size-fits all approach; a firm’s leaders must customize the design, implementation, and operation of its system of quality management based on the nature and circumstances of the firm and the engagements it performs. Customized design can be a daunting task but is also largely dependent on the complexity of the firm and the type of work it does. The standards provide flexibility for firms to design their system in the way that is most relevant and effective for its practice.
Also enhanced under SQMS No. 1 are monitoring activities, through increased emphasis on evaluating the system annually, including identifying deficiencies, investigating the root cause and remediating as necessary.
Those acquainted with SQCS will remember the six elements of quality control. This will transition to eight components of quality management under SQMS:
- The firm’s risk assessment process (new).
- Governance and leadership (adapted from Leadership responsibilities in SQCS No. 8).
- Relevant ethical requirements (mostly unchanged).
- Acceptance and continuance of client relationships and specific engagements (mostly unchanged).
- Engagement performance (mostly unchanged).
- Resources (adapted from Human resources in SQCS No. 8).
- Information and communication (new).
- Monitoring and remediation (adapted from Monitoring in SQCS No. 8).
The controversies
The draft SQMS standard No. 1 released in 2021 had several controversial proposals. The top point of concern was the proposal’s requirement for a firm to inspect a sample of completed engagements, with a prohibition against self-inspection, i.e., no one can inspect work they have done themselves. For sole practitioners and small firms, this would have been inherently problematic in terms of both cost and logistics, especially if required annually.
The final SQMS standard requires annual monitoring and assessment of the system of quality management but allows for inspection of a sample of completed engagement for each engagement partner on a cyclical basis. Peer review, which includes inspection of a sample of engagements by an independent third party, can serve as that inspection on a three-year cycle. Depending on a firm’s risk profile, every three years may be an appropriate cycle. In between inspection performed as part of peer review, self-review of completed engagements may be an effective part of monitoring if the practitioner has the competence and objectivity to do so. However, for some firms, ongoing involvement of an external party may be the best response to address risks to quality.
A second controversy in the draft was in proposed SQMS No. 2: A required two-year “cooling off” period before an individual who had previously been the engagement partner could serve as the engagement quality reviewer (EQR) for an engagement. In the final standard, the principle that the EQR must be able to be objective is unchanged, but without rigid imposition of a prohibition that may not be relevant to a firm’s situation. Firms may choose to implement a cooling-off period, but it is not mandatory. More important is that the firm consider factors that could affect the EQR’s ability to be objective.
The third feature of the draft standards that generated much feedback was the original proposed effective date of Dec. 15, 2023. The final approved effective dates:
- Systems of quality management in compliance with SQMS No. 1 are required to be designed and implemented by Dec. 15, 2025, and the firm’s first evaluation of the system must take place within one year of that date.
- SQMS No. 2 is effective for audits or reviews of financial statements for periods beginning on or after Dec. 15, 2025, and other engagements in the firm’s accounting and auditing practice beginning on or after Dec. 15, 2025.
- SAS No. 146 is effective for engagements conducted in accordance with generally accepted auditing standards for periods beginning on or after Dec. 15, 2025.
Looking ahead
The ASB received more comment letters on this exposure draft — more than 170 — than on any other standard proposed in the past 15 years. The provisions of the final standard indicate that the comments submitted made a difference in the standard-setting process.
This standard will affect EVERY firm that performs engagements under SAS, SSARS, and SSAE. While no action is required immediately, firms need to understand this is on the near-term horizon. Education opportunities and implementation guidance will be coming in future months. Watch for it!
Topics: Accounting & Auditing
Faye Hayhurst, CPA
Faye Hayhurst is the MNCPA director of finance and administration. She is committed to using numbers to tell relevant stories, although she also employs words, charts and occasionally clothing to communicate a message. While some have questioned her about the pressures of being the CPA for the MNCPA, Faye considers presenting financial information to fellow CPAs a dream job. Outside of storytelling with numbers, Faye enjoys directing her church's handbell choir, visiting national parks and other scenic places, and checking out the chocolate products at Trader Joe's. Faye can be reached at 952-885-5540 or fhayhurst@mncpa.org.
Blog Posts by this author
