Session 3B Quality Assurance and Building Effective Oversight System - Paul Hurks

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  • 1. Quality AssuranceBuilding Effective Oversight SystemsPaul F.M. HurksDirector NBA International Accountancy (Royal NIVRA)
  • 2. Quality Control & Quality Assurance Why do we need – Quality Control (QC), and – Quality Assurance (QA) for high quality financial reporting? – Specific responsibility of the profession – Principle based standards – Assessments are highly judgmental – Human behavioural characteristics
  • 3. Specific Responsibility: Public Interest IFAC/PIOB (PPP5) definition of public interest: “The net benefits derived for, and procedural rigor employed on behalf of, all society in relation to any action, decision or policy” Elements:- Public (broad scope)- Interests of the public (economic in nature, management of resources)- Responsibility of the profession (in a large variety of roles)- General assessments (cost/benefit; processes, trade-offs)
  • 4. Principle based StandardsPrinciple-based regulation• Code of Ethics (Attitude)• Clarified ISAs (Processes)• ISQC1: Quality Control (Governance)• SMO1: Quality Assurance (Enforcement) All assessments are highly judgmental
  • 5. Code of Ethics (IESBA)Fundamental Principles:• Integrity• Objectivity• Competence & Due Care• Confidentiality• Professional Behaviour(and Independence)Conceptual Framework• Safeguards & Evaluation All assessments are highly judgmental
  • 6. Clarified ISAs (IAASB) Standards for Auditing & Assurance• An audit is an audit• Principle-based requirements for processes• Requirements to interprete in a case-systemic way• Tailor made application All assessments are highly judgmental
  • 7. ISQC1 (IAASB) (1) Standards for Quality Control Control: firms are required to design and implement a system of Quality Control, tailor made, according to the following concept: All assessments are highly judgmental .
  • 8. ISQC1 (IAASB) (2) Obligations for Quality Control• Leadership responsibility• Client relationships and assignments• Human resources• Engagement performance• Monitoring• Documentation All assessments are highly judgmental
  • 9. SMO1 Quality Assurance (IFAC) Obligations for Quality Assurance• Implementation by the PAO of a Quality Assurance Review Program for Audit Engagements (minimum) of Financial Statements: “enforcement”• For audits of listed entities (minimum)• Best endeavours to encourage and assist other responsible authorities (government, regulators);• Publish QC-standards and guidance (ISQC1) requiring firms safeguarding compliance with ISA 220 for audit professionals 3 or 4? levels All assessments are highly judgmental
  • 10. When high quality FR is safeguarded? (1) Agency Theory for Audit & Assurance former (3 parties): client – shareholder – auditor current (4 parties): client – stakeholder – auditor – PAO, or current (5 parties): client – stakeholder – auditor – PAO - regulator (N.B.: stakeholder = public)
  • 11. When high quality FR is safeguarded? (2) FR Infrastructure UNCTAD Capacity Building Framework Pillar A: Legal and Regulatory Frameworks Pillar B: Institutional Frameworks Pillar C: Human Resources Pillar D: Capacity Building Process
  • 12. When high quality FR is safeguarded? (3) Why do we need oversight bodies overseeing PAO’s and auditors? Because regulation often is only adopted, ‘not really’ implemented, reflecting elements of: – lack of awareness of the concepts – lack of professional knowledge and practical experience (techniques (science) versus judgements (art)) – lack of substance over form (mirror-approach) – characteristics of human behaviour (threats, pressures) Public society heard too much of: “All this is not illegal” The profession is responsible for reliability It is all about TRUST
  • 13. When high quality FR is safeguarded? (4) Cascade effect of IFAC development program influencing attitude - IFAC: SMO’s, CAP - PAO: QA, CPD, including Regulator - Firm: QC, daily practice - Client: ethical behaviour, CSR
  • 14. When high quality FR is safeguarded? (5) Client Auditor PAO Regulator Public Legal & Regulatory Framework √ √ √ √ √ Institutional Framework √ √ √ √ √ Human Resources √ √ √ √ √
  • 15. Challenges for PAO development (1) Development categories towards “Center of Excellence” – Managerial support (business model, governance, practices) – Technical support (rules, regulation, tools, guidance) – Intellectual support (ethics, values, mindset, principles, attitude, concepts, judgment)
  • 16. Challenges for PAO development (2)• Quality Control (firm) • Quality Assurance (PAO)- Concept of ‘Public Interest’ - Nature of PAO- Definition of ‘Quality’ - Legal environment- Concept of ‘Control’ - Government support- Ethics & Attitude - Size of the profession- Nature of clients - Competition (clients/tools)- Sole Practitioners - Requirements reviewers- Competence - Authority reviewers- Practical Experience - Judgments- Judgments - SMO1 business model- Availability of tools (IT) - Language- Language - More PAOs- Transparency - Transparency
  • 17. Challenges for PAO development (3) What can we do improve QC and QA practices? Step by step approach: 5 years (usually it will take at least double time): Year 1: legal framework and regulation (international, convergence) Year 2: education & CPD (QC, QA, auditing) Year 3: design of Firm’s QC manual (customized) Year 4: perform assignments accordingly (documentation) Year 5: first time availability of audit documentation for review*) *) recommendation to start reviews earlier for the learning process
  • 18. Lessons Learned (1) What can we do improve QC and QA practices? – Education and training: tone at the top, mindset, attitude, public interest, quality, control concepts, professional skepticism, unbiased judgment, awareness of individual/collective professional responsibility, practice examples, transparency; – Firms, big & small: tone at the top, culture, recruiting, promotion, incentives, training on the job, macro-responsibility, governance code; – Audit regulation: visualize in documentation, reviews, monitoring, liability; – Ethics regulation: implementation of CoE, substance over form; – Guidance: best practices, lessions learned, war stories and success stories, whistleblowers, IFAC tools; – Clients, big & small: review culture, CSR, governance, audit committee, transparency; – Government: support, legislation, collaboration (donor support) – Academia: further research.
  • 19. Lessons Learned (2) What can be done to implement QC and QA? – Step by step approach following local economy developments – Patience: the 5 year strategy (at the minimum) – Start self assessments and QA-reviews early in the process (learning) – Accept learning process of all stakeholders involved (coaching) – Liaison with government / regulator (combine competence and authority) – Joint effort (postpone naming and shaming, avoid duplication) – Share experience and /or collaborate cross border (language / size) – Train members, reviewers and trainers (ttt) in QC, QA and audit practice – Make available sufficient tools (IFAC and local; local language, IT-based) – Start easy; postpone perfection; manage expectations – Design proper (country-) business model for QA (viability) – Include assurance and related services in the reviews (learning, viability) – No one size fits all > customized solutions
  • 20. Conclusions (1) Elements are essential for accountants/auditors in a large variety of roles and environment: –In all roles and services: Preparer, Assurance provider and Oversight; –In all environments and sectors: from PIE to SME environment; in Private Sector and Public Sector –Joint effort: Government support in PAO development facilitates donor support
  • 21. Conclusions (2) Professional: > contribute to reliable FR Profession: > contribute to effective and efficient markets “High quality financial reporting will not create economic growth, but for creating economic growth you cannot do without it*)” *) quote Ian Ball IFAC CEO
  • 22. Thank you for your attention.