Editor: Stephen P. Valenti, CPA
In a time when so few things feel in control, a documented plan to maintain quality can bring some sense of order to tax practices of all sizes. Particularly as firms contemplate what "the future of work" may look like, including the possibility of employees working remotely, a common understanding among partners and employees of the expectations for operating with a quality mindset becomes even more impactful. This column offers practical suggestions that firms can use to implement a system of quality management.
The emphasis on quality management in a tax practice is certainly not new. Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), Section 10.36, imposes a requirement to take "reasonable steps to ensure that the firm has adequate procedures in effect for all members, associates, and employees" and places this responsibility, subject to discipline, on the individuals who have "principal authority and responsibility for overseeing a firm's practice governed by this part." The spirit of this responsibility is echoed in Circular 230, Section 10.33, which sets forth best practices for tax advisers and states:
Tax advisors with responsibility for overseeing a firm's practice of providing advice concerning Federal tax issues or of preparing or assisting in the preparation of submissions to the Internal Revenue Service should take reasonable steps to ensure that the firm's procedures for all members, associates, and employees are consistent with the best practices set forth in ... this section.
For its part, the AICPA is currently considering the inclusion of quality management in the Statements on Standards for Tax Services (SSTSs) (available at future.aicpa.org). Although most CPAs would say quality management is already a cornerstone of the profession, it is not an enforceable standard and not applied consistently. Some firms and practitioners have robust written or well-known and practiced standards to ensure quality in their work, while others have little to no established policies, which puts them, their staff, and their clients at risk.
Adding quality management to the SSTSs would reinforce the significance of consistent tax practice quality management and clarify AICPA members' responsibility for the quality of tax work.
The AICPA is seeking feedback on its proposal to include quality management in the revised SSTSs. An email address for comments is provided at the end of this column.
The quality management standards that are being considered for tax work would differ from the AICPA's Statements on Quality Control Standards (SQCS) (A Firm's System of Quality Control), which are issued by the AICPA Auditing Standards Board and are only applicable to audit and attestation engagements performed by CPA firms.
Designing and maintaining a system of quality managementThe remainder of this column focuses on broad principles that tax practices should consider when implementing a quality management system. Quality management, like so many other areas of practice management, is not (1) a one-size-fits-all proposition or (2) static. How a firm approaches quality management logically depends on the profile of the firm, taking into account factors such as:
- Number of professionals;
- Location of its professionals (e.g., everyone working in one office, everyone working in multiple offices, virtual workers, or anything in between);
- Knowledge and experience of personnel; and
- Specific practice areas.
Tax practice leaders should anticipate the plan for quality management may need to evolve over time as facts about the practice change and treat the plan as a living document.
In order to support tax practices in their efforts to design and maintain a system of quality management, the AICPA continues to update and maintain the Tax Practice Quality Management Guide (the QM Guide) (available to Tax Section members at future.aicpa.org). Leveraging the six elements of quality management from the SQCS (applicable to firms providing accounting and auditing services), this resource is not intended to establish standards; rather, it is designed as an educational resource for tax practices of all sizes to use when contemplating a system of quality management. The QM Guide also contains a scalable template that firms can use to fashion their own documentation of quality management.
Because small tax practices have unique considerations, the discussion below provides practical perspectives on how small firms and sole proprietorships can address each element of the QM Guide. While one size does not fit all, quality management is important no matter the profile of a firm.
How to get startedThe QM Guide suggests a principles-based approach to developing a system of quality management. The focus is on six elements:
- Leadership responsibilities for quality within the firm;
- Relevant ethical requirements;
- Acceptance and continuance of client relationships and specific engagements;
- Talent;
- Engagement performance; and
- Monitoring.
Each of these elements is discussed in more detail below. This information is intended to help tax practice leaders address quality control within their own unique practices. They can also use the scalable template to document their quality management system and educate partners and employees.
Element 1: Leadership responsibilities for quality within the firm
Simply put, this element of quality management boils down to the "tone set at the top." In order to develop a culture of quality within the tax practice, leadership should establish expectations. It is crucial that appropriate leadership be designated to be responsible for developing and leading the practice's quality management system and that sufficient supporting personnel be provided to assist with execution, including routine communications to and training of practice professionals. A greater understanding and appreciation for quality matters will lead to better client service and potential firm growth, as illustrated in the chart "The Quality Cycle," below.
Sole practitioner/small firm view: For smaller firms, it may seem like a burden to document practices and procedures, especially if you are a sole practitioner and there is no one else to even read them. However, the process of documenting your firm's "best practices" is a worthwhile endeavor to establish an upfront and agreed-upon reference point for new and existing staff to understand what is expected of them while also documenting the firm's commitment to quality management should there ever be a client complaint. Even a two-person firm may be surprised at how significantly expectations may diverge when common practices and procedures are documented.
Element 2: Relevant ethical requirements
This element of the QM Guide focuses on ensuring that the firm and its personnel are aware of and in compliance with applicable professional, statutory, and regulatory requirements (e.g., Circular 230; applicable Code and Treasury regulations sections; the AICPA Code of Professional Conduct, including the SSTSs; state boards of accountancy; and state and local tax authorities). The emphasis here is not only on quality management as pertaining to a specific client engagement; it is also on making sure firm professionals are adhering to personal ethical responsibilities, such as meeting CPE requirements and maintaining a preparer tax identification number (PTIN) where applicable.
Sole practitioner/small firm view: For a smaller firm, one simple step may be to have a CPE tracking system to ensure both owners and staff are meeting the CPE requirements necessary to maintain their CPA license. Many state societies now include CPE tracking systems as a member benefit included in their annual dues.
Element 3: Acceptance and continuance of client relationships and specific engagements
Before entering into a relationship with a new client, firms should consider any risk associated with those relationships or the particular services being requested (e.g., independence, competence, and other conflicts). Having a documented process in place for evaluating new client relationships and new engagements and mitigating risks can facilitate consistency in approach. The firm should evaluate potential risks, taking into account the factors shown in the chart "Risk Evaluation," below. In addition, processes should be established to revisit client relationships routinely to identify potential new conflicts not existing at the original inception of the relationship.
Sole practitioner/small firm view: Although engagement letters are not required by either the IRS or the AICPA for nonattest engagements, the use of engagement letters is one of the best ways to increase communication with clients, define the scope of the engagement and document the formal acceptance and continuation of the client relationship. In addition, malpractice insurance providers regularly remind policyholders that engagement letters are one of the most important risk control tools a CPA firm can employ to mitigate professional liability risk in all engagements.
Element 4: Talent
Firm talent is arguably the most critical component of a tax practice. Having professionals with the appropriate skills to serve firm clients is imperative, and, as such, it is of the utmost importance to consider the elements of quality management appropriate throughout the professional life cycle beginning with hiring and continuing through the professional's tenure with the firm. This life cycle includes the following stages:
- Hire: Implement and maintain a hiring process that identifies talent matching the objectives of the firm, and establish an onboarding process to introduce new professionals to the firm's quality management processes and procedures.
- Comply: Establish processes for confirming professionals comply with relevant regulatory standards.
- Educate: Continue to develop professionals through ongoing education.
- Monitor: Establish processes to monitor work assignments including supervision of work.
- Promote: Evaluate engagement performance and establish a process for professional advancement.
Sole practitioner/small firm view: A sole practitioner may never hire a full-time employee; however, he or she may from time to time rely on the work of others, be that seasonal/temporary help or a third-party consultant. Accordingly, documenting procedures ahead of time for relying on the work of others will help the sole practitioner to comply with Treasury regulations when or if this occurs.
Additionally, sole practitioners who review their own work should establish processes to ensure their work is accurate. Examples can include preparing two versions of a simple tax return and comparing results, summarizing tax return data in a spreadsheet, then comparing it to the draft return, before reviewing it (such as 48-72 hours).
Element 5: Engagement performance
This element of a quality management system focuses on the controls appropriate for a client engagement from start to finish — executing services in a manner that is consistent with the firm's overall quality management standards. In this section of the QM Guide, firms are encouraged to establish controls related to engagement planning, staffing, supervision and review, and documentation and communication of engagement results. A critical area of quality management relates to confidentiality of client information and putting policies and procedures in place to protect client data and adhere to regulatory and other legal requirements that address confidentiality and privacy.
Sole practitioner/small firm view: For smaller firms, here again, simply documenting policies and procedures will help drive compliance with this element. Consider practices such as:
- The use of checklists that can be obtained from the AICPA, commercial providers of practice management resources, or your malpractice insurance carrier;
- Tax return due date trackers; and
- Documenting security and retention procedures.
Remember that the QM Guide provides suggestions for quality management procedures, not requirements. While some tax practices find significant value in requiring the completion of checklists for every engagement, others may decide to use them only as general guidelines or use them only for certain client types. Tax practitioners should develop a quality management style that best suits their particular practice and not follow a one-size-fits-all strategy. Best practices also change over time with the implementation of new technologies, growth of the practice, and changes in client specialization. Any quality management plan should be reviewed at least annually to adapt to any such changes.
Element 6: Monitoring
As noted earlier, a quality management system is not static. It is important to have processes in place to stress-test the system and evaluate the need for adjustments over time. Updates to the quality management system may be needed to accommodate changes in the external environment, such as new regulations or professional standards, or changes to the internal environment such as growth of a firm or other changes that suggest modifications to the quality management system would be appropriate.
Sole practitioner/small firm view: No system of quality management is complete without some type of monitoring to evaluate the need for adjustments. Tax practices are not subject to the AICPA Peer Review Program, which applies only to accounting and auditing services. However, tax practices can perform a self-inspection of completed tax returns by someone within the firm who is not part of the original engagement team.
Even a sole practitioner could benefit from this process, either by hiring another firm to complete a review or performing a self-review on previously completed returns. While a firm-on-firm review can provide a valuable external perspective on completed tax work, a simple self-review that occurs after sufficient time has elapsed subsequent to the completion of a project can yield positive results as well, benefiting from an individual's gains in experience and perspective.
Quality management: More important than ever
Quality management, long a cornerstone of tax practice, is more important than ever today because of the complexities of practice — both internal and external. The details of a quality management system will inevitably vary based on the facts and circumstances of a firm and will also evolve over time as changes warrant. Regardless of the specific form of the quality management system, having one that is well designed and maintained serves to provide firm leadership with control — and demonstrates an unwavering commitment to quality.
Please send any feedback on the proposal to include quality management in the revised SSTSs to Henry J. Grzes, CPA, the Association’s Lead Manager–Tax Practice & Ethics, at Henry.Grzes@aicpa-cima.com. All comments received will be shared with the entire SSTS Revision Task Force.
Contributors |
|
| Holly C. Love, CPA, is a managing director at Deloitte Tax LLP. She is a current member of the AICPA Tax Practice Responsibilities Committee (TPRC). Stephen P. Valenti, CPA, is professor emeritus of accounting at New York University and a member of the AICPA TPRC. The author thanks David J. Holets, CPA, and Joe Scutellaro, CPA, for their contributions to this column. Mr. Holets is a tax partner and leader of tax quality control functions at Crowe LLP in Indianapolis and is the chair of the Statements on Standards for Tax Services (SSTSs) Revision Task Force and is also the vice chair of the TPRC. Mr. Scutellaro is a partner with CohnReznick LLP in Eatontown, N.J., and is a past chair of the TPRC. For more information on this column, contact thetaxadviser@aicpa.org.
|
