What to know about engagement quality reviews (SQMS No. 2)

The February A&A Focus webcast brought together experts from public accounting, quality management, and the AICPA to explore key issues affecting practitioners in early 2026. Hosted by Bob Durak, CPA, and Andrew Merryman, CPA, the program featured the return of Julie Killian, CPA, principal at Rehmann and chair of the AICPA Technical Issues Committee under the Private Companies Practice Section; first-time guest Joe Lynch, CPA, managing director and shareholder at Johnson Global Advisory; and our previous host, Carl Mayes, CPA, vice president–CPA Candidate Quality and Competency at the AICPA.

The February discussion provided a wide range of information and focused on practical implementation issues for special-purpose frameworks (SPFs), evolving expectations around engagement quality reviews (EQRs) under the new quality management standards, and an update on the AICPA’s Profession Ready initiative, which aims to reshape how early-career CPAs are prepared for a rapidly changing profession.

Presentation and disclosure pitfalls in special-purpose frameworks

Killian returned to continue the discussion of special-purpose frameworks (SPFs). This month, she discussed the common concerns regarding presentation and disclosure for financial statements prepared using non-GAAP frameworks, including the tax basis, cash and modified cash basis, and the AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities.

Killian emphasized that a key result when using SPFs is clarity. Financial statements must be clearly identified as non-GAAP, with statement titles, headings, and notes explicitly referencing the applicable framework. Using generic titles without indicating the basis of accounting can create confusion for users and undermine transparency.

She noted that disclosures under SPFs often involve more judgment than under U.S. GAAP, particularly because there is no single authoritative disclosure checklist for some frameworks. While the disclosure burden may be reduced, management and practitioners still must ensure that financial statements are not misleading. Key areas commonly requiring disclosure include related-party transactions, significant debt terms, commitments and contingencies, and significant subsequent events.

Killian also addressed the common misconception that using an SPF eliminates the need for any traditional financial statement disclosures. She noted that, while the form of disclosure may shift toward more narrative and qualitative explanations, the underlying objective remains the same. Users require sufficient information to understand the entity’s financial position, results of operations, and significant risks.

Killian provided an example involving debt disclosures, explaining that while GAAP financial statements may include a detailed maturity table, SPF financial statements could instead describe the key repayment terms and future principal reduction requirements in narrative form, provided the disclosure remains clear and informative.

Another recurring issue involves explaining the differences that may occur when comparing financial information to that prepared under U.S. GAAP. Killian explained that entities are not required to identify or quantify every difference, only those that are relevant to the financial statements presented. For example, if the SPF permits a taxes payable method instead of deferred taxes, that difference should be described, but not quantified. Overly detailed or boilerplate explanations can detract from usefulness, while leaving GAAP-specific disclosures in non-GAAP statements can create additional confusion.

Engagement quality reviews under the new quality management standards

Lynch provided an overview of EQR requirements under Statement on Quality Management Standards (SQMS) Nos. 1 and 2. He clarified the interplay between the two standards and addressed ongoing questions surrounding effective dates and implementation.

Lynch explained that SQMS No. 1 establishes firm-level policies and processes, including identifying which engagements require an EQR. That standard became effective Dec. 15, 2025, and firms were expected to have their systems implemented and operating. SQMS No. 2 addresses engagement-level responsibilities and applies to audits and reviews of financial statements for periods beginning on or after Dec. 15, 2025. Understanding the effective dates is critical as firms plan their quality management activities and documentation.

Lynch also clarified the role of the engagement quality reviewer. The reviewer does not reperform audit procedures or conduct a post-issuance review. Instead, the reviewer provides objective evaluation of significant judgments, ethical compliance, consultations, and the engagement partner’s involvement throughout the engagement. He emphasized that reviewers are independent of the engagement team and are selected to have the competence and capability to challenge the engagement partner in areas involving significant judgment. Lynch stressed that the engagement quality reviewer does not need to be a partner if those criteria are met.

Timely involvement of the engagement quality reviewer was highlighted as a practical takeaway. Early engagement during planning can improve effectiveness and reduce late-stage issues, aligning with the broader objectives of the quality management standards. See the JofA article “How to Prevent Late-Stage Engagement Quality Review Surprises” for more practical advice on the timing of EQRs.

Building the future CPA: The AICPA’s Profession Ready Initiative

In the final guest segment of the program, Mayes provided an update on the AICPA’s Profession Ready Initiative, noting that it was developed in response to accelerating changes in the profession driven by automation, artificial intelligence (AI), and offshoring.

Mayes explained that firms increasingly rely on automation and technology for tasks traditionally performed by entry-level staff. Further, firms have begun questioning how to effectively train and develop new hires when many foundational tasks are now performed by software or outsourced teams. He noted that a growing percentage of firms are leveraging offshoring in some capacity and that this trend is contributing to a broader need for talent transformation.

Mayes also pointed to the growing mismatch between how prepared graduates believe they are and how prepared employers believe they are. He noted that this apparent disconnect suggests that the profession may be experiencing a significant readiness gap.

The Profession Ready Initiative, he explained, is designed to conduct a profession-wide analysis of what competencies early-career CPAs need in today’s environment. Mayes described the initiative as being developed “for the profession by the profession,” with input gathered from practitioners across firm sizes and service lines.

Mayes shared that early feedback suggests firms are still seeking foundational accounting knowledge such as debits and credits and transaction cycle understanding. He noted that some firms report having to provide remedial GAAP education to a significant portion of new graduates before those hires can be effectively trained in assurance work.

He also highlighted recurring themes around communication and critical thinking. Mayes noted that younger professionals may be more comfortable with text-based communication than phone or in-person conversations. He also emphasized that as firms adopt AI tools, critical thinking becomes even more important because early-career professionals must be able to evaluate and challenge AI-generated outputs rather than accept them without skepticism.

Mayes explained that the Profession Ready Initiative is expected to produce a skills framework describing what early-career CPAs need to succeed. He also noted that the AICPA intends to develop learning solutions and teaching resources for educators based on the findings. The learning solutions will potentially leverage emerging technologies such as AI and simulation-based training.

Mayes described the learning solution component as particularly promising, noting that technology may provide opportunities to help professionals build practical experience faster than traditional methods allowed.

He encouraged practitioners to participate in the initiative by completing the AICPA survey and by volunteering for focus groups planned later in the year.

Looking ahead

Durak closed by thanking viewers for their participation in this month’s A&A Focus webcast and reminded them that the next broadcast is scheduled for March 4. Scheduled guests for the March program include Danielle Supkis Cheek, CPA, who will return for more discussion of AI use in assurance and accounting; Halie Creps, CPA, chair of the AICPA Auditing Standards Board, who will address the recently proposed changes to the baseline attestation standards; and Mike Cheng, CPA, who will return for more discussion of the intricacies of lease accounting.

AICPA members are encouraged to attend these monthly events and review the accompanying newsletters for more in-depth coverage of these critical topics. Members can access archives of past sessions at the A&A Focus Series webpage.

— Dave Arman, CPA, MBA, is senior manager–Audit Quality at the Association of International Certified Professional Accountants. To comment on this article or to suggest an idea for another article, contact Jeff Drew at Jeff.Drew@aicpa-cima.com.