Quality AssuranceBuilding Effective Oversight SystemsQuality AssuranceBuilding Effective Oversight Systems

Paul F.M. HurksDirector NBA International Accountancy (Royal NIVRA)

Paul 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 Standards

Principle-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 ControlControl: 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? levelsAll 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 & RegulatoryFramework √ √ √ √ √

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)

- Concept of ‘Public Interest’- Definition of ‘Quality’- Concept of ‘Control’- Ethics & Attitude- Nature of clients- Sole Practitioners- Competence- Practical Experience- Judgments- Availability of tools (IT)- Language- Transparency

• Quality Assurance (PAO)

- Nature of PAO- Legal environment- Government support- Size of the profession- Competition (clients/tools)- Requirements reviewers- Authority reviewers- Judgments- SMO1 business model- Language- More PAOs- 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

Thank you for your attentionThank you for your attention

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