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Quality AssuranceBuilding Effective Oversight SystemsPaul F.M. HurksDirector NBA International Accountancy (Royal NIVRA)
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
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)
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
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
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
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 .
ISQC1 (IAASB) (2) Obligations for Quality Control• Leadership responsibility• Client relationships and assignments• Human resources• Engagement performance• Monitoring• Documentation All assessments are highly judgmental
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
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)
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
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
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
When high quality FR is safeguarded? (5) Client Auditor PAO Regulator Public Legal & Regulatory Framework √ √ √ √ √ Institutional Framework √ √ √ √ √ Human Resources √ √ √ √ √
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)
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
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
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.
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
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
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