Walking the talk on quality control

By Deborah K. Rood, CPA

Quality control, as every CPA knows, is a crucial component of an accounting practice. Yet quality control's importance isn't always prominently reflected in firm incentives.

Firms obviously must pay close attention to—and incentivize—financial metrics focused on business development. But it's also important to track and consider quality-control metrics, as they can help prevent errors and reduce the risk of professional liability claims. Despite the important lessons learned from prominent malpractice cases, many firms continue to emphasize financial metrics and growth in the performance and firm management processes while not properly incentivizing quality. Here are examples of how firms can promote greater quality control by incorporating related metrics into the compensation and promotion of partners and staff.

WHAT IS A QUALITY-CONTROL SYSTEM?

To incentivize quality control, a CPA firm first must understand and develop its quality-control system. The AICPA Statements on Quality Control Standards (SQCSs) describe six elements of a firm's system of quality control:

  • Leadership,
  • Relevant ethical requirements,
  • Acceptance and continuance of client relationships and specific engagements,
  • Human resources,
  • Engagement performance, and
  • Monitoring.

While the SQCSs are targeted to an accounting and auditing practice, they offer a good model for any CPA firm, regardless of services provided. In fact, the AICPA Tax Section used the SQCSs as a foundation for its Tax Practice Quality Control Guide.

INCENTIVIZING QUALITY CONTROL

It is often said, "What gets measured gets done." The same can be applied to quality control. Why not incentivize behaviors that lead to the delivery of quality professional services by adding metrics?

Areas ripe for providing incentives include:

  • Specialization,
  • Billing practices, and
  • Client relationships and documentation.

Specialization

Specialization ensures the engagement teams have the necessary qualifications to perform an engagement competently, reducing the risk of an error that may result in a professional liability claim, and should be incentivized.

Specialization may be promoted through a variety of techniques. A CPA firm could provide financial incentives for staff members to work with existing industry or technical specialists on projects early in their career to assist in identifying and developing their own area for specialization. For example, a staff member could work with three specialists throughout the year to meet a performance bonus metric. As staff members gain experience and progress through their careers, the firm could ask each individual to identify an area of specialization, take continuing professional education, obtain relevant credentials, and work on a number of projects in the chosen specialty area. As the staff members' expertise grows, opportunities for expertise and experience should increase along with financial rewards.

Partners with experience in a specific industry or niche could include staff development in their performance plans. The partner's reward would be twofold—higher-quality work from a more experienced engagement team resulting in a more efficient engagement review.

To the extent an engagement partner lacks expertise in an area, the project should be referred to someone who possesses the relevant knowledge and experience. To encourage this behavior, the firm may consider a "reward" for internal referrals, with a compensation component based upon work referred internally, not just that partner's billing book.

Billing practices

Many CPAs hate the billing process and procrastinate when the time comes around. However, billing delays often lead to difficulty beyond just collecting fees. Large outstanding receivables may raise independence concerns. In addition, when a CPA firm sues a client for delinquent fees, a countersuit against the CPA firm for professional negligence may occur. As a result, every CPA firm should carefully manage billing and collections to keep outstanding balances low for all clients.

One solution to billing procrastination is to reward compliance with firm billing practices. For instance, many firms require billing to be completed by the fifth of the month. While some firms may withhold partner paychecks until billing is completed, a positive incentive for complying with the rules may offer greater motivation than a reprimand for noncompliance. For example, a contribution to the biller's favorite charity could be made for meeting the firm's billing protocols for the year.

Another opportunity to improve the billing process includes incentives for keeping receivables current. One technique may involve an element of compensation based upon reducing the partner's average days of receivables outstanding. Depending on the circumstances, reducing the days receivable may be a more appropriate bonus criterion than new business generated.

Client relationships and documentation

The engagement performance section of the SQCSs requires that the work performed support the conclusions reached and be appropriately documented. Documentation provides written evidence of a client conversation, meeting, or decision. Unfortunately, documentation is often overlooked due to other pressures and commitments. Consider adding an element of compensation related to documenting client meetings.

For instance, year-end planning meetings with clients are common in a tax practice. These meetings provide an opportunity for the CPA to strengthen the client relationship and provide valuable advice. Following the meeting, the CPA should write a brief email or letter summarizing the key points, including decisions made and planning opportunities. When a portion of an employee's performance bonus is based upon the staff member producing this documentation, it may have a greater priority than other demands.

A FINAL NOTE

Many firms tell their professional liability underwriter that quality control is an important facet of the firm, but the firm's compensation and management structure may inadvertently place more emphasis on matters leading to undesired behaviors rather than encouraging quality. Review your firm's performance management process. Do your metrics support quality? What about your quality-control structure? Do those in charge of quality have client responsibilities? To whom do they report? If the quality-control function is considered subordinate to client services or business development, is your firm really walking the talk?

Deborah K. Rood (deborah.rood@cna.com) is a risk control consulting director at CNA.


Continental Casualty Co., 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.

This article provides information, rather than advice or opinion. It is accurate to the best of the author's knowledge as of the article date. This article should not be viewed as a substitute for recommendations of a retained professional. Such consultation is recommended in applying this material in any particular factual situations.

Examples are for illustrative purposes only and not intended to establish any standards of care, serve as legal advice, or acknowledge any given factual situation is covered under any CNA insurance policy. The relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured. All products and services may not be available in all states and may be subject to change without notice.

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