In a significant move toward unifying a number of related standards and harmonizing them with a new international standard, the Auditing Standards Board has voted out a proposed statement on quality control.It was one of three exposure drafts issued for comment by summer's end.

"I was happy that the board was able to vote out a proposal on quality control," said Chuck Landes, American Institute of CPAs director of auditing and attestation. "This is a very positive step forward in improving the quality control systems of America's CPA firms."

Landes said that of the three proposals, the one on quality control would have the most impact on firms that perform audits of private companies.

"For the last year, we've been trying to gradually harmonize American standards with those of the International Auditing and Assurance Board," Landes said. "They came out with a new quality control standard a few months ago, so we've been undertaking a project to assess how their standard is different from ours and whether there are things that we should change, now that we can look back over the audit failures of the last several years."

One of the most important changes will be new guidance on "the tone at the top," that is, the seriousness with which the management of a CPA firm emphasizes to staff the importance of integrity and quality. Never before has an ASB standard specifically addressed the responsibility of leadership in promoting quality control.

"It's clear that good quality starts with the firm's management and leadership, and it's incumbent on those at the top of a CPA firm to send a clear message to everyone in the organization that quality must come first, irrespective of any economic concerns," Landes said.

Part of that tone, he said, involves compensation policies, which should be oriented around the quality of audit-related performance, rather than business retention or sales.

Paragraph 17(b) of the document states that a CPA firm may "design its policies and procedures addressing performance evaluation, compensation and promotion (including incentive systems) with regard to its personnel, to demonstrate the firm's overarching commitment to objectives of the system of quality control."

Paragraph 54(c) goes on to state that a firm may "help personnel understand that their compensation and advancement to positions of greater responsibility depends, among other things, upon performance quality and adherence to ethical principles, and that failure to comply with the firm's policies and procedures may result in disciplinary action."

"Getting new business is important, but you never can let those kinds of economic decisions interfere with the quality that the CPA firm must produce," Landes said.

The proposal also provides guidance on independence, acceptance and continuance of engagements, engagement performance and documentation, and other areas that have been provided in disparate standards that have now been brought together in a single statement.

Landes described the proposal as "very, very close" to the international standard, with just one major difference. The international standard requires that smaller CPA firms hire other firms to inspect their work for quality. The current and proposed U.S. standards allow firms to perform internal inspections in addition to traditional periodic peer reviews. The ASB felt that the peer reviews, which aren't performed in most other countries, were a sufficient back-up of internal inspections.

If approved as proposed, ASB Standard No. 7, A Firm's System of Quality Control, would apply to audits, reviews, compilations and other attestation engagements as of Jan. 1, 2008.

From should to must

The board also issued an exposure draft of an "omnibus standard" that would patch up and clarify the board's fieldwork standard, general standard and four reporting standards by changing "should" to "must" wherever appropriate.

The third document was a proposed standard on attest engagements. It introduces a hierarchy of attestation literature. It applies the same hierarchy that applies to auditing principles. Standards themselves are of the highest level, while interpretive guidance, including statements of position, is at the secondary level, with the third level being any other relevant documents, such as risk alerts, articles in accounting publications and appropriate guidance.

At the same late-June meeting where the board voted to issue the drafts, it also discussed an ongoing project on the formatting of auditing standards. The IAASB is working on a statement that would separate requirements - that which the auditor must do - and guidance - that which auditors can do to meet the requirements.

Currently, many U.S. standards have a sentence or paragraph that states a requirement, then several sentences or paragraphs of examples or clarifications. Standard-setters have generally considered that to be an efficient format for combining the two. Auditors have reported difficulty in distinguishing between the two, however, and in knowing that they have successfully identified all the requirements in a lengthy document that includes much guidance. The ASB is considering dividing standards into two sections, one of only requirements, the other of guidance.

The advantage of a clear-line distinction between the two, however, might be balanced by the inconvenience of the separation. Auditors might read the requirement and ignore the guidance, or read the guidance and feel that they understood the requirement.

Landes explained that the IAASB's interest is in part based on the needs of countries where auditing standards are legislated into law, in which case advisory guidance would not be appropriate. That would not be a problem in the United States, where standards are established by the private sector.

The AICPA expected to post the drafts on its Web site,, by late July, with the comment periods tentatively set to end on Sept. 15 for the omnibus and attestation standards, and Sept. 30 for the quality control standard, though those dates are subject to a final vote by the board.

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