Governance and leadership

Governance and leadership set the tone at a firm, and create the environment in which all the other components of the firm’s system of quality management operate. For a system of quality management to achieve the intended outcomes, firm leadership needs to ensure that quality management requirements and principles are incorporated into all aspects of practice management, including a culture that facilitates proactive and regular self-scrutiny.

Firm level considerations

ISQM 1 para 28 requires firms to establish the following quality objectives that address the firm’s governance and leadership, and establish the environment that supports the system of quality management.

a. The firm demonstrates a commitment to quality through a culture that recognises and reinforces:

i. The firm’s role in serving the public interest by consistently performing quality engagements
ii. The importance of professional ethics, values and attitudes
iii. The responsibility of all personnel for quality relating to performing engagements or activities within the system of quality management, and their expected behaviour
iv. The importance of quality in the firm’s strategic decisions and actions, including the firm’s financial and operational priorities.

b. Leadership is responsible and accountable for quality.
c. Leadership demonstrates a commitment to quality through its actions and behaviour.
d. The organisational structure and assignment of roles, responsibilities and authority are appropriate to enable the design, implementation and operation of the firm’s system of quality management.
e. Resource needs, including financial resources, are planned for and resources are obtained, allocated or assigned in a manner that is consistent with the firm’s commitment to quality.

In practice, creating this environment entails establishing a mission, vision and core values incorporating the firm’s commitment to quality, and setting out clear quality objectives and principles for the firm. This needs to be a collaborative effort, which is frequently revised and communicated to ensure buy-in of all staff.

Leadership needs to assess the firm risk, in terms of how the practice is managed. The ownership structure plays a role in determining whether the firm holds any risk for achieving quality objectives. The actions taken, or not taken, to ensure sustainability, equity and continuity within the firm should be considered. The operational structure of the firm needs to be closely considered to determine its potential impact on achieving quality objectives. This structure should be set up in such a way that it can support the goals of the firm. It is also important to consider the extent to which financial planning of the firm incorporates quality, as too few financial resources allocated to quality pose a risk to the firm’s achievement of quality objectives. Adequate budget should be allocated to recruiting the right staff, retaining staff, training staff, putting the necessary measures in place to ensure compliance, and monitoring compliance. This should be reflected in the proper classification of expenses or allocation of resources in financial reports and strategic plans.

Engagement level considerations

The engagement partner must take overall responsibility for managing and achieving quality in the audit engagement, including taking responsibility for creating an environment for the engagement that emphasises the firm’s culture and the expected behaviour of engagement team members. Sufficient and appropriate involvement by the engagement partner throughout the audit engagement is of utmost importance.

The engagement partner must take responsibility for clear, consistent and effective actions that reflect the firm’s commitment to quality, and establish and communicate the expected behaviour of engagement team members.

If the engagement partner assigns certain procedures, tasks or actions to other members of the engagement team, the engagement partner must continue to take overall responsibility for managing and achieving quality on the audit engagement through direction, and supervision of those members of the engagement team, and review of their work.

Common concerns identified

Despite firms’ significant efforts, there is still a continuing trend identified by audit regulators of recurring deficiencies on all components of quality management at firm and engagement level. This casts doubt on firm leadership’s ability to sufficiently promote a quality-oriented culture, or fulfil its responsibility to ensure consistent and sustainable high audit quality within the firm.

ISQM 1 requires more rigorous monitoring of the system of quality management, understanding the root causes of deficiencies and swift remediation of those deficiencies. A culture that facilitates proactive and regular self-scrutiny will help engagement teams feel supported in their goals for quality engagements, and enable continual improvements in quality.

In summary

Firm leadership must closely evaluate its objectives, values and strategies, and how the practice is managed to ensure that it reflects a commitment to quality. This needs to be clearly communicated to ensure that staff live up to the values of the firm. Likewise, engagement partners need to be sufficiently and appropriately involved throughout their audit engagements, and take responsibility for managing and achieving quality on these engagements.

LEAF can assist firms with assessing governance and leadership through firm and engagement- level monitoring reviews, methodology design reviews, and training staff on the relevant requirements and procedures.

References

1. IAASB, ISQM 1: Quality management for firms that perform audits or reviews of financial statements, or other assurance or related services engagements
2. IAAS, ISA 220 (Revised): Quality management for an audit of financial statements

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