There are two committees working on developing new quality management standards for auditors. Neil Amato talks to Sara Lord, CPA, the chair of one of those committees, about the feedback they are receiving, how the new standards incorporate a risk-based approach, and the next steps in the process.
Also, Drew Adamek reviews a new study about ESG assurance opportunities and explores the potential tax implications of LIFO inventory interruptions due to COVID-19.
What you'll learn from this podcast:
- How the new quality management standards will be scalable for firms of all sizes.
- How the new standards are incorporating technology and risk.
- Why the deadline has been extended.
- The next steps for updating the standards.
- The best way to submit feedback on the new standards.
Play the episode below or read the edited transcript:
To comment on this episode or to suggest an idea for another episode, contact Neil Amato, a JofA senior editor, at Neil.Amato@aicpa-cima.com.
Drew Adamek: Welcome back to the Journal of Accountancy news podcast. I'm senior editor Drew Adamek. This week, senior editor Neil Amato dives into the development of new quality management standards with CPA Sara Lord.
And later, I'll take a look at ESG assurance opportunities for CPA firms and the potential tax implications of LIFO inventory interruptions due to COVID-19.
But first, a word from our sponsor.
Neil Amato: Welcome back to the podcast. This is Neil Amato. I'm joined now by Sara Lord. Sara is a CPA and a former member of the AICPA Auditing Standards Board. She is a chair of one of two task forces developing new quality management standards that take a more risk-based approach. Sara, thank you for being on, thank you for being a repeat guest. First, can you remind listeners what the proposed new quality management standards aim to accomplish?
Sara Lord: Absolutely, Neil, and thanks for having me back to continue to talk about these important standards. Really, the goals of the standard proposal are to continue to enhance quality in all of the assurance services that we provide for our profession. So, it's been over 15 years since the standards were really re-looked at and updated. So, what we're doing is focusing on bringing them current and making sure they include things like the use of technology in the work that we do and also adding that risk-based component so they can be scalable to different sizes of firms and allow firms to look at what services they provide and create that environment of quality management tailored to their unique situations.
Amato: The AICPA Auditing Standards Board, or the ASB, released an exposure draft in February. What are some of the topics that you're most eager to receive comments on and maybe have you been able to review early comments that have come in on these issues?
Lord: You know, we have had the opportunity to see some of the early comments letters that are coming in. We've also conducted 17 roundtables where we've had people join us to have open Q&A discussions about many of the key topics in the standard, which has been hugely helpful because we're getting that early feedback before we even go into the formal evaluation process of the comment letters themselves.
A couple of the key things that we're really looking for feedback on — first of all, it's just the entire framework. The idea of sending quality objectives, identifying the risks for your firm of not meeting those objectives, and then identifying the responses. So, that framework is different. That risk assessment framework is a little different than the current quality control standards. So, we're really looking for overall feedback from firms on "Do you think this makes sense? Is it operable? What else will you need for help implementing a risk-based standard?"
Then, there are two items that are a little bit — a place where the standard goes a little more specific. So, it's largely principles based. There are two areas that we did propose convergence for the exposure draft with what was issued by the international standard setters. That relates to the prohibition on self-inspection, the idea that if you individually do work on an engagement, when you get to the end of the year, your monitoring process, you can't review your own work.
Then, the second is a cooling-off period. If you have a transition from engagement partner or engagement leader, into an engagement colleague reviewer role, you'd have to have a period of time where you didn't work on that same engagement. So, those are two items specifically highlighted in the exposure draft that we're looking for feedback on how that would actually impact you in practice.
Amato: How do you see this proposal having the potential to help firms — especially smaller firms — cut down on unnecessary work because of the scalability component?
Lord: Neil, scalability — it's a great question and something that we really had a lot of great and healthy discussions on during the roundtables and gathered lots of great feedback. The intent of the standard is that it is scalable to any size firm that's implementing it. When you step back and look at what's in the standard, there's the eight components that every firm has to think about and think of the objectives of those components.
So, if I use the component of client acceptance as one example. In a smaller firm, client acceptance might be something that you look at the three objectives that are in the standard — the objectives that you need to meet are: evaluating whether the client has ethics and integrity, whether you have the competence and knowledge to perform the engagement in accordance with the required regulatory and professional standards rules, and then do you have any finance or operating incentives that would override good judgment in accepting that client?
When you think about that from a smaller-firm perspective, your approach to addressing those risks may be very focused and tailored. If you're a sole practitioner, for example, you would have all of that information that you would be identifying yourself. You'd understand the client. "Is this a client that I want to do business with? Am I confident they'll be able to give me the information I need, and we'll be able to work together as we work through the assurance engagement?" You'd identify whether you have the skills and competence to do the work or can you obtain them if you don't have them yet? And do you have the time to do the work?
When you look at it from that perspective, the idea really is that the standard can scale — kind of scale and tailor in for that smaller-firm practitioner to be able to say, "OK, here's what I've thought about." Maybe have a short, quick documentation of how you address those risks. Then, for a larger firm, it might scale up. You might have a full client acceptance tool and process that you go through. They may do background checks. Those different risks are intended to be able to be scaled to the nature of what the firm needs to be thinking about when they're looking at any of the objectives. You know, not just the client acceptance one that I used as an example.
Amato: What's the timeline for people to comment? I guess it might be referred to as a deadline by this moment on the exposure draft.
Lord: Absolutely. I think we're inherently deadline-driven at times, so we do have a final date that we're requesting comments from. That's Aug 31 (Tuesday). So, it is coming up quickly. The comment letters can be sent in to firstname.lastname@example.org. You can send in an official, formal comment on letterhead, or once you send an email to that email address, it becomes a comment letter, so you don't have to go through a process of over-formality. If you haven't written comment letters before, you don't have to worry about the formality of it. We're really just looking for the feedback.
Amato: Again, that comment period — obviously, the deadline is next week. It was first set to end in June. Why was it extended to the end of August?
Lord: You know, it was extended to the end of August because we received feedback when we issued the exposure draft. We had the period ending in June, thinking that would be sufficient time over the summer months for people to really dig in and absorb the questions and the content of the exposure draft. What we heard is that this year, the combination of factors — some of the new tax law changes, some of the assurance changes related to some of the government programs where clients were needing more assistance, led a lot of practitioners to have that busy season really pushed through the whole summer.
So, people asked for a little bit more time to say, "This is really important. We really want to engage in it." We wanted to make sure that we provided that opportunity, that everyone who wanted to be engaged had the chance to do that and didn't feel overly pressured against the other client services that they're providing.
Amato: Well, Sara mentioned that comment letter email address. In this episode's show notes, we'll include that email for people to comment on the proposals. Sara, thank you for being on the podcast.
Lord: You're welcome, Neil. Thanks so much for having me.
Adamek: In other news, the Center for Audit Quality released a study that showed that just 31 companies in the S&P 500 used public company auditors to perform assurance on their ESG reporting, while 235 companies surveyed used a non-audit firm assurance provider. However, increased investor interest and regulatory focus on ESG reporting create substantial opportunities for CPA firms to perform ESG assurance in the future.
And 2020 was a challenging year for companies that use LIFO to value their inventories. Trade and supply chain interruptions led to significant reductions in inventory levels in 2020. As a result, many of these companies will realize additional taxable income and unexpected tax liabilities.
For more on what you need to know about qualified inventory interruptions and what the AICPA is doing to address the issue, as well as the latest in ESG assurance trends, please visit the Journal of Accountancy stories linked in the show notes.