by Sarah Beckett Ference, CPA
Quality is not an act, it is a habit.
This quote, often mistakenly attributed to Aristotle, sums it up well. Quality is something that can only be embedded through a CPA firm’s people and culture. It is not something on a checklist or completed prior to the issuance of a CPA firm report. It is a fundamental value and way of life for a true professional.
The role quality, or lack thereof, plays in a professional liability claim cannot be over-emphasized. CNA, the endorsed underwriter of the AICPA Professional Liability Insurance Program, discussed the importance of quality with a panel of CPAs who provide expert testimony in defense of professional liability claims made against CPA firms.
The Importance of Quality Control
What role does quality play? Why is it so important? Vincent J. Love, the principal of VJL Consulting states, “Quality control puts in place a system that results in properly performed engagements that helps reduce the possibility of error in financial statements or tax returns or results in a more suitable recommendation in a consulting engagement.” Joe Cipolla, a partner at Cipolla & Co., LLC agrees, noting “Quality control is essential because it provides a structure and consistency for the manner in which engagements should be conducted and work product produced in order to avoid costly mistakes.”
Appropriate quality controls not only help reduce the risk of an error or omission on individual engagements, it also benefits the firm’s reputation. “Nothing speaks stronger about a CPA firm and its people than the quality of its work and work product,” says Cipolla. Indeed, “users of financial statements reported on by the firm will have greater confidence in the reliability of the financial information,” if the CPA firm has a reputation of providing quality services adds Love. David Kast, a partner at Stockman Kast Ryan & Co., believes that the quality of work performed enhances both the firm’s external and internal reputations. “Providing quality services helps support a quality workplace where people are proud to work.”
Firm Quality Indicators
When evaluating the defensibility of a professional liability claim, accounting experts will not only look at the quality of the engagement to which the claim relates, but also the firm’s overall control environment. Our panel of experts noted the following key characteristics of a firm that is committed to quality:
- Tone at the top – A CPA firm’s “tone at the top is the most important characteristic of the firm,” says Love. The actions and behaviors of senior management and owners set the tone for the entire firm. “Management committed to quality does not take shortcuts or push the boundaries of the firm’s expertise in order to accommodate a client request,” he adds.
- Client acceptance and continuance – Both Kast and Robert Harris, a principal at The Rehmann Group, believe that strong client acceptance and continuance processes demonstrate a firm’s commitment to quality. Firms should be willing to “terminate clients who place the firm in difficult positions or do not provide complete and open responses to inquiries,” notes Harris.
- Training – Kast indicates that a firm “should be committed to providing excellent and relevant training to its staff, including partners.” He adds that many quality control deficiencies he sees at CPA firms can be addressed by “training, training, more training – and then re-training.” Harris also supports this view emphasizing that training “should be tailored to the types of engagements on which a professional will be working.”
- Performance management – Love notes that evaluations of firm personnel and decisions related to promotion should “focus more on the quality of engagement performance than on revenue managed or new business sold. Revenue and earnings are important, but should not dominate.”
Engagement Quality Indicators
Quality should extend through all areas of the firm, including the delivery of services. The most important quality control procedures for individual engagements according to our experts were as follows:
- Planning and risk assessment – Regardless of the service, taking the time to evaluate the risk of an engagement is critical. Love adds, “Once risk is quantified and sensitive areas identified, procedures should be designed in response to noted risks to ensure the engagement objective is accomplished.” Harris “can’t say enough about the planning discussions that occur between team members familiar with the client.” Regular information sharing meetings with all firm members who serve the client may help uncover additional risks.
- Assignment and involvement of team members – Kast notes the importance of partner involvement throughout the engagement life cycle, which sets the appropriate tone for the rest of the team. “Partner involvement should be early and often,” he states. Love adds that other team members “should be assigned based upon their knowledge of the engagement’s issues, not simply availability.” When the engagement team requires additional knowledge or skills, Harris notes the team should have access to resources “either internally or externally for consultation when issues arise.”
- Secondary review – An important quality control procedure, according to Cipolla, is “to have a highly competent person that is independent of the engagement review the workpapers and related work product to ensure compliance and, in turn, quality.” He adds, “this ‘cold’ quality control review is very effective for all types of engagements.”
- Documentation – In the event of a professional liability claim, contemporaneous documentation of the work performed can greatly assist the firm’s defense and eliminate disagreements over memory. However, documentation can only be helpful if it exists and supports the conclusions reached. Love states, “Proper documentation should include memoranda on the judgment applied by the engagement team and the evaluation of how client management has applied its own judgment.” Harris adds, “All concerns should be documented and put in writing to those charged with governance at the client.”
Common Quality Control Deficiencies
The experts have highlighted some factors that demonstrate a firm’s commitment to quality, but what about quality control deficiencies? Where do firms struggle?
- Accepting engagement outside of firm expertise – Firms are more likely to make an error on an engagement that is beyond the scope of the firm’s experience and competency. Love notes that this is “a common deficiency.”
- Improper documentation contained in emails – “Much care must be taken regarding comments made in emails,” says Kast. “Today, emails are an extremely important part of engagement documentation, even if they are not included in the workpapers.”
- Failing to revise approach in response to risks identified – Harris notes that, too often, he sees firms “doing the same thing as last year and not questioning why.” The engagement approach should be tailored to risks identified during planning but also revised when issues are identified during the engagement.
Promoting a Culture of Quality
So what can firms do to help raise the bar on quality? Our panel provides some final words of wisdom.
Cipolla believes that “every firm should have a defined quality control structure with a firm member or team responsible for the firm’s quality control processes.” Individuals charged with this oversight should be given the appropriate time and authority to help ensure that services are delivered and professionals conduct themselves in accordance with the firm’s quality control procedures. Kast adds that “all staff and partners should feel they are an integral part of the firm’s quality control system,” noting that the benefits of this collaboration will be evident in the quality of work performed and in the firm’s financial results.
Love advises firms to “set the right tone at the top and do not permit commercial considerations to override professionalism.” Harris adds that firm leaders should “walk the talk” and set a good example for the rest of the firm. He also suggests finding “a peer reviewer who is known to be tough and can provide a different perspective into the quality of your work” noting the “extra effort will be rewarded by better quality work and a lower likelihood of a professional liability claim.”
Sarah Ference, CPA (email@example.com) is a risk control director at CNA.
This information is produced and presented by CNA, which is solely responsible for its content. The purpose of this article is to provide information, rather than advice or opinion. It is accurate to the best of the authors’ knowledge as of the date of the article. Accordingly, this article should not be viewed as a substitute for the guidance and recommendations of a retained professional. In addition, CNA does not endorse any coverages, systems, processes or protocols addressed herein unless they are produced or created by CNA. Any references to non-CNA Web sites are provided solely for convenience, and CNA disclaims any responsibility with respect to such websites.
To the extent this article contains any examples, please note that they are for illustrative purposes only and any similarity to actual individuals, entities, places or situations is unintentional and purely coincidental. In addition, any examples are not intended to establish any standards of care, to serve as legal advice appropriate for any particular factual situations, or to provide an acknowledgement that any given factual situation is covered under any CNA insurance policy. Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions and exclusions for an insured. All CNA products and services may not be available in all states and may be subject to change without notice.
Continental Casualty Company, one of the CNA insurance companies, is the underwriter of the AICPA Professional Liability Insurance Program. Aon Insurance Services, the National Program Administrator for the AICPA Professional Liability Program, is available at 800-221-3023 or visit cpai.com.
CNA is a registered trademark of CNA Financial Corporation. Copyright © 2015 CNA. All rights reserved.