Systemic controls or systemic cause?
November 20, 2018 | Faye Hayhurst, CPA
We use buzzwords as a shortcut to refer to broad concepts in business. Buzzwords can be relatively straightforward and well-accepted (“return on investment”), a product of the times (“cloud computing”) or an overused trendy reference (“low hanging fruit”).
In peer review, there are buzzwords that cause concern for every party in the process: “systemic cause.”
To understand this phrase, we need to know the system that is being referenced: a CPA firm’s system of quality control. Every CPA firm that has an accounting and auditing practice is required to have one (reference: Statement on Quality Control Standards - SQCS - No. 8).
The objective of the system is clear and rather elegant: To provide the firm with “reasonable assurance that a) the firm and its personnel comply with professional standards and applicable legal and regulatory requirements and b) reports issued by the firm are appropriate in the circumstances.” (SQCS 8).
Complying with professional standards, as well as legal and regulatory requirements, and issuing appropriate reports generally does not happen by accident. That’s why SQCS 8 requires firms to plan for it (design a system of quality control) and follow through with its plan (compliance). In a system peer review, reviewers are charged with evaluating both the design of a firm’s system of quality control and the firm’s compliance with its system.
When a peer reviewer’s tests uncover situations where the firm did not comply with standards or requirements, or issued an inappropriate report, this indicates a flaw in the firm’s system. Sometimes, the error is isolated; it was not noted in other work, and human beings are fallible and make mistakes. Other times, the error is not isolated but is more pervasive. In these cases, the goal of a peer review is to identify the “systemic cause” of the problem.
Systemic cause generally relates to one of six elements identified by SQCS 8 around which a firm must establish policies and procedures in its system of quality control:
- Leadership responsibilities for quality within the firm (the tone at the top).
- Relevant ethical requirements.
- Acceptance and continuance of client relationships and specific engagements.
- Human resources.
- Engagement performance.
To determine systemic cause, it’s been said that the question “why?” must be asked at least three times. If a firm didn’t test a significant audit area as required, the initial answer may be that they didn’t understand it was necessary. Why didn’t they understand it? Was it due to the attitude of firm management (tone at the top), accepting a client whose business they didn’t understand, having the wrong people on the job, or sloppy auditing? And why didn’t the firm’s monitoring catch it?
The goal of identifying a systemic cause is to pinpoint what the firm must change, correct and/or improve in order to not repeat the problem. Once the cause is clear, solutions can be implemented. Although the root cause might not be initially easy to distinguish, wrestling to achieve correct classification is important for the firm’s future work.
Systemic cause may be a peer review buzzword, but quality is core to the profession. The ultimate objective for CPAs is to have firms known not for their systemic causes, but for their systemic controls that consistently produce the quality work the world depends on.
Topics: Peer Review, Regulation
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 email@example.com.
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