Implementing the new quality management standards is not just a compliance exercise. ISQM (UK) 1 is about proactively and comprehensively managing risks to quality. Its aim is also about greater accountability, improved focus on leadership and culture, and continuous improvement through a required monitoring and remediation feedback loop.
“Firms need to approach implementation with a commitment to truly modernise and tailor their policies and procedures. Retrofitting quality risks to existing quality control policies and procedures will not meet the requirements – or the spirit – of the standard. However, those policies and procedures may be an appropriate response to an identified quality risk,” says Kate Dalby, Project Director, Financial Reporting Council (FRC).
The International Standard on Quality Management (UK) 1 (ISQM (UK) 1) replaces the existing quality control standard and deals with a firm’s responsibility to design, implement and operate a system of quality management (SoQM) for audits or reviews of financial statements, or other assurance or related services engagements.
The FRC hopes firms will view the change as an opportunity to focus on delivering high-quality engagements, and shape the firm’s governance and leadership to drive the oversight, control and discipline needed to embed a culture of quality. Firms should also embrace the new standards as an opportunity to better understand and respond to conditions, events, circumstances, actions or inactions that adversely affect the achievement of quality.
By 15 December this year, firms should have established their quality objectives, identified and assessed their quality risks and designed and implemented their responses to address such risks. Firms are also expected to have designed and implemented their monitoring and remediation activities. There is much to be done.
The FRC cautions that the new standards regime is not a one approach fits all. ISQM (UK) 1 is scalable and can be adapted for firms of varying size, complexity and circumstance.
“We expect each firm’s SoQM to be unique to the nature and circumstances of the firm and the engagements it performs. Therefore, a thorough analysis of quality risks that are relevant to the nature and circumstances of the firm and the engagements it performs are critical to tailoring appropriate policies and procedures. Firms should also take into account matters that give rise to audit quality issues, and internal or external inspection findings, when determining and addressing those risks to quality,” Dalby says.
Leadership is accountable for embedding the culture within a firm, but quality and all the associated professional behaviours are the responsibility of all personnel. ISQM (UK) 1 is designed to greatly enhance expectations and accountability of firm leadership for QM and create an appropriate culture committed to the consistent performance of quality engagements.
Firms need to win over hearts and minds in their audit practice – and the wider firm – to embed quality in its culture. Firms, in many cases, may have to exercise a great deal of change management for a culture of quality to be effectively embedded. The time and resource for this should not be underestimated.
“Robust planning is critical. We expect all firms to be finalising an implementation plan by now, using strong project management methods to set clear actions and milestones, and establishing governance arrangements to monitor implementation of the QM standards,” says Dalby.
Any network requirements, services or resources need to be taken into account when developing the architecture of the SoQM and tailoring policies and procedures. Commitment, time, resource, project management and business partnering within the firm are needed to meet the implementation date.
Josephine Jackson, Director of International Auditing and Assurance Standards, Financial Reporting Council and Board Member of the IAASB, says: “Ultimately, we believe that a key foundation for consistently delivering high-quality engagements rests in the SoQM, and these new and revised standards will raise the bar. Embedding a culture of quality and continuous improvement into the firm’s strategic decisions, operations and business processes, coupled with a robust commitment to rigorous ethical standards, will be a significant step forward in improving quality.”
With new quality management standards for audit on the horizon, there is an opportunity for firms of all sizes to supercharge their audits and reap significant knock-on benefits that go beyond ticking the regulatory box
Quality management in audit firms
Resources to help audit firms prepare for new quality management standards ISQM 1, ISQM 2 and ISA 220 (Revised).Read more
Webinar: Quality management in audit firms
Join Gill Spaul and David Smith for the first of a series of quality management webinars, as they discuss the requirements and how firms can be proactive.Watch now
Podcast: How do we measure audit quality?
Anna Draper, Jayne Kerr, Tracy Gordon and Katharine Bagshaw join ICAEW’s Iain Wright to discuss.Listen now