After a spate of regulations over the last couple of years, the ICAI has come out with yet another document Standard on Quality Control 1.
Mohan R. Lavi
The importance of Quality Control (QC) in any area of operation can never be overemphasised in an era when business is transcending boundaries and giving rise to complexities. There is a story about a company in the US which felt that it had adopted the best quality control methodology till a Toyota team came in and proved that the same quality product can be produced in a much lesser time.
QC entered the auditing world too when a couple of top-notch corporates in US sunk apparently with a little bit of a nod from their auditors. After a spate of regulations over the last couple of years, the Institute of Chartered Accountants of India (ICAI) has come out with yet another document Standard on Quality Control (SQC) 1, Quality Control for firms that perform audits and reviews of historical financial information, and other assurance and related service engagements. This Standard is recommendatory from April 1, 2008, and mandatory from April 1, 2009.
The Standard starts off by informing one that the Standard on Auditing (SA) 220, Quality Control for Audit work, would also be applicable since it deals with quality control procedures for specific types of engagements. The very fact that there was an erstwhile Auditing and Assurance Standard 17 with the same title implies that quality control has been on the statute book for some time now and, hence, the need for reinventing the wheel needs to be questioned.
It can also be argued that a firm should adopt a single QC policy for every assignment that it does instead of attempting to document different QC procedures for each assignment. The entire substance of QC in a firm has been given six main areas:
Leadership qualities for quality within the firm;
Acceptance and continuance of client relationships and specific engagements;
Engagement performance; and
Although this sounds like a QC chart for a software release, the importance of all these areas can never be overemphasised, as firms would have to commence thinking and working like corporates now.
The write-up on leadership qualities for quality within the firm mentions the title Chief Executive Officer.
Past QC initiatives
Since the early days of its inception, the ICAI has had a Disciplinary Action Committee that has decided on quite a few cases of professional misconduct and the booklet of the ICAI on the same topic contains many examples of such conduct.
The Standard just reemphasises the importance of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour during the conduct of an assignment.
Independence of an auditor has become the subject matter of much debate over the last few years but it is clear that independence of any person is a state of mind and any amount of vigilant legislation cannot make an independent person non-independent and vice-versa.
Before commencing an assignment, the firm is supposed to get reassured that the client has integrity, the firm has the resources and the competency to complete the assignment and can comply with the ethical requirements too.
(The author is a Hyderabad-based chartered accountant.)
The Standard exhorts firms to develop human resources in a manner that the QC mission of the firm is not jeopardised just because of a bad hire. Engagement performance and monitoring detail the steps to be followed during an audit assignment to maintain QC benchmarks.
One of the main benefits of the Sarbanes Oxley Act was the Walk-Through principle which laid out that every year, one walks through every major area of operation right from placement of a purchase order till it is paid out and entered into the General Ledger. Since one assumes that a lot of things are in place during the course of ones normal duties, the Walk-Through can sometimes be an awakening that not everything is hunky-dory. A software company realised that there was a delay in capitalisation of fixed assets by a week after doing a Walk-Through.
Its the documentation
The need for documenting each and every major area of QC initiatives flows right through the Standard. A reading of this Standard and past ones on similar topics, one gets the impression that there is an overdose of literature on the same subject since we have not had any major debacle wherein we can point our fingers at only the auditors.
In case there have been instances wherein, for instance, some banks have wound up, one could blame it on loose legislation and inept supervision. A firm in India gives enough disclaimers in its report, notes on accounts and the management representation letter to escape legal embarrassment.