The FICPA Peer Review and Accounting Principles and Auditing Standards Committees met jointly to discuss and respond to the recent exposure draft issued by the Auditing Standards Board (ASB) of the AICPA entitled: Proposed Statements on Quality Management Standards. The changes being presented will have a substantial impact on all firms with an accounting and auditing practice.
The proposal creates three new standards that would supersede Statement on Quality Control Standards No. 8, create a new QM section in AICPA Professional Standards, and supersede SAS No. 122, as amended, section 220, Quality Control for an Engagement Conducted in Accordance with Generally Accepted Auditing Standards.
Two critical shifts identified by the FICPA Committee members included in the proposed standards that could have a significant impact on firms of all sizes, but particularly smaller sized firms, are noted below:
Current quality control standards (QC Sec. 10) allow a firm to involve those individuals performing the engagement or the engagement quality control review to inspect engagements as part of the firm’s annual monitoring process.
The proposed QCM standards state that self-inspection will not be allowed; thus, many small firms will be required to engage individuals outside the firm to perform annual inspections. The ASB believes that this prohibition is necessary to enhance audit quality. The ASB viewpoint was that they believed safeguards did not exist that could lower the self-review threat to an acceptable level.
One of the points brought up by the ASB in consideration of this was that in the U.S. we have a peer review program that International Standards do not. However, the ASB believed that was not a sufficient safeguard within the firm to alleviate the self-review threat.
Cooling-off Period for Engagement Quality Reviewers
Under the extant QC standards, an engagement quality control (EQC) reviewer only has to be independent of the engagement (i.e. not involved in the engagement) and must meet certain other qualifications, like experience, continuing education, knowledge, etc. There currently is no cooling-off period requirement when an engagement partner rotates off of the engagement to when they become eligible as an EQC reviewer for that engagement.
The proposed QCM standards is implementing a cooling-off period for such an instance of two-years. The ASB believes, like the international standards, that the ability of an engagement quality reviewer to perform an objective evaluation of significant judgements is affected when the individual was previously involved with those judgments as the engagement partner. Thus, to create an appropriate safeguard, the ASB believes a cooling-off period of two years in such a situation would be in the public interest.
The final joint committee response from the FICPA is expected to be completed by early July and will be submitted upon approval to the AICPA for their consideration prior to issuing the standard.
FICPA members impacted by the proposed changes are encouraged to add their voice to the discussion by submitting comments to the AICPA ASB by Aug. 31, 2021.
- Exposure Draft: Proposed Statements on Quality Management Standards Exposure Draft
- Exposure Drafts of Proposed SASs, SSAEs, and SQCSs
Send comments to CommentLetters@aicpa-cima.com by Aug. 31.
Consider assisting and encouraging others to submit comments by allowing the FICPA to post your response.
Send your response to the FICPA Governmental Affairs team at email@example.com and indicate your willingness to share and be recognized in FICPA publications.