Johannesburg, 30 April 2019 – The continued relevance of the auditing profession lies in its ability to sustain public trust in the auditing and assurance process. Delivering high-quality work is at the heart of achieving this. In reaction to the financial crisis, the environment in which audits, other assurance and related service engagements are performed has changed. Corporate governance practices and principles have been revised and companies have revisited their business practices. There has also been a significant increase in the focus on audit quality, accompanied by increased expectations of the auditor from stakeholders, writes Jana Kritzinger, member of the South African Institute of Chartered Accountants.
The profession recognised the need to address the concerns raised around certain International Auditing Standards becoming “outdated" and not remaining fit for purpose in serving the public interest. In response, the International Auditing and Assurance Standards Board (IAASB) embarked on a project to revise certain standards, which included the standards relating to quality control.
What will change?
Auditors and their firms have to become more proactive in managing quality. To guide them, the IAASB recently published three exposure drafts for quality management at the firm and engagement levels: (1) ISQM1, set to replace ISQC1, (2) ISA 220, set to become ISA 220 (revised) and (3) ISQM2, a new standard dealing with Engagement Quality Reviews.
One criticism of the current approach to quality control is that it is seen as a “tick box” exercise that is reactive. To address this concern, and with the public interest at the forefront of the movement to revise the requirements, these standards propose that firms adopt a quality management approach (QMA). This approach requires that those responsible for firms’ governance proactively and continuously monitor and manage the quality of assurance and non-assurance work both at firm and at engagement levels.
A QMA will significantly change how firms manage quality. Instead of focussing on standard controls to manage quality, which in many instances are essentially treated as a mindless, tick-box exercise for compliance’s sake, a QMA requires a new mind-set - quality needs to be an embedded and always-active aspect of a firm’s culture.
How do firms adopt a new mind-set on quality?
It starts with the firm’s leadership deciding to establish a “quality identity” for the firm. Firm leadership has direct responsibility and accountability to create and sustain a strong quality culture in the firm, which supports the delivery of consistent and rigorous services that meet public interest by virtue of their high quality. The profession’s ethical values (integrity, objectivity, professional competence and due care, confidentiality and professional behaviour) underpin a quality culture.
Leadership “buy-in” is essential to the successful development and implementation of a quality culture. In formal and practical terms, those charged with firm governance have to introduce structures and provide the resources necessary to implement systems, processes and procedures that essentially compel the achievement of quality audits. Informally, leaders have to live this quality through their personal conduct and behaviour: they are after all, the role models whose actions will set the quality-driven “tone at the top”.
Quality needs to permeate the entire firm. The norms and ethos of individuals’ daily behaviour need to reflect the firm’s self-identification as an organisation focused on quality, and this would also be reflected in the firm’s rituals and the language people use to interact with each other. This then also needs to be evident in other, more formal systems such as the client acceptance and continuance systems, the firm’s ethical code and its policies and practices manuals; it needs to permeate the firm’s training programs, the performance management systems, authority structures, formal decision-making processes and resource allocation.
To sustain a mind-set focussed on quality requires an entity-wide desire for continuous improvement. It is fed by a philosophy of continually seeking new ways to improve quality.
How does a QMA work?
A QMA is a modernized, holistic approach to firms’ management of quality. The essence thereof is to focus firms’ attention on risks that may have an impact on engagement quality. It requires of a firm to proactively identify, respond and monitor its risks to quality, thereby promoting an ongoing process of improvement. This approach should be tailored to accommodate the size and nature of a firm and the various services it provides. A QMA is therefore equally applicable to firms that perform complex audits, firms that perform audits of less complex entities, and firms that perform only reviews of financial statements or other assurance or related services engagements. If a firm succeeds in tailoring this approach to its unique circumstances, the requirements as set out in the standard will remain fit for purpose and be adaptable to the changing environment.
When should a firm start with a QMA?
Introducing a QMA takes time and effort and the impact of this commitment should not be underestimated. The requirements of the QMA may go as far as impacting on the operations and structure of the firm. The short answer, therefore, is not unexpectedly: “as soon as possible”. It is anticipated that these new standards will become effective from December 2021. This means that by December 2021 firms need to have implemented an effective system of quality management.
The new and revised requirements included in the three exposure drafts represent a significant change to the profession because the proposed new requirements could go as far as impacting on the firm’s organisational structures and operations. The profession is hopeful that the three new and revised standards will address the public interest concerns and improve and enhance the quality of engagements, thereby sustaining public trust in the auditing and assurance process.
The South African Institute of Chartered Accountants (SAICA), South Africa’s pre-eminent accountancy body, is widely recognised as one of the world’s leading accounting institutes. The Institute provides a wide range of support services to more than 46 000 members and associates who are chartered accountants [CAs(SA)], as well as AGAs(SA) and ATs(SA), who hold positions as CEOs, MDs, board directors, business owners, chief financial officers, auditors and leaders in every sphere of commerce and industry, and who play a significant role in the nation’s highly dynamic business sector and economic development.
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