Regulators have fundamentally changed how they conduct audit inspections.
For decades, inspections zeroed in on individual engagements — the audit files, the testing, and the documentation. But in recent years, regulators have realized that while this approach uncovers engagement-level deficiencies, it doesn’t address why they occurred in the first place. That’s why the Public Company Accounting Oversight Board (PCAOB) and other regulators are now focusing audits on a firm’s system of quality management (SQM).
An effective SQM prevents audit failures before they appear at the engagement level. By evaluating the processes, controls, and infrastructure that make up your firm’s SQM, regulators can determine if your firm is set up to drive consistent, high-quality outcomes firmwide. To satisfy regulatory expectations, your firm must show that its quality control systems are proactive, integrated, and scalable.
Below we dive into how regulators evaluate SQM processes, where firms often fall short, and how modern technology can help your firm increase SQM effectiveness while driving improvements in engagement quality, efficiency, employee satisfaction, and other areas.
How regulators evaluate SQMs
A true system of quality management is a holistic set of policies, processes, and controls designed to reduce errors, strengthen compliance, and improve consistency and quality across engagements. A strong SQM framework helps your firm stay out of trouble, avoid re-work, and protect its reputation.
Key SQM components regulators evaluate include:
- Governance and leadership: Whether firm leadership demonstrates accountability, provides effective oversight, and prioritizes audit quality throughout the organization
- Risk assessment: How your firm identifies, evaluates, and addresses quality risks
- Client and engagement acceptance: Procedures for ensuring your firm only accepts work it can perform competently and in line with quality standards
- Human resources: Mechanisms for evaluating staff competence, assessing staff capacity, and supporting ongoing professional development
- Engagement performance and monitoring: Whether there are systems for consistently reviewing and tracking engagement work to ensure it meets professional standards
- Independence and ethics: How the firm continuously monitors compliance to prevent conflicts of interest and maintain objectivity and public trust
The critical, common thread across all of these areas is consistency. Different offices, geographies, and service lines often have different processes and controls for handing engagements — but regulators expect them to be consistent, especially across jurisdictions, networks, and coordinated group audits.
Where firms are falling short
Inspections by the PCAOB, Canadian Public Accountability Board (CPAB), Financial Reporting Council (FRC), and other regulators have uncovered a global pattern of systemic personal independence and risk assessment deficiencies. As a result, regulators are paying extra attention to these areas and working together very closely to ensure firms understand what’s expected of them.
To prevent the hefty fines, reputational damage, and revenue loss associated with compliance violations, your firm needs a modern quality control system that satisfies regulatory requirements.
Why your firm must modernize now
Accounting firms that still use decentralized legacy systems, spreadsheets, and manual processes to manage engagements can’t meet the quality control standards regulators demand. Decentralized systems make it extremely challenging to ensure consistent quality management across different offices and geographies. They also can’t provide the detailed audit trails and real-time visibility required for effective quality control.
And manual tracking processes can’t easily flag independence issues. Manual attestations in particular are problematic because they can’t catch violations before they happen — meaning by the time your firm detects an issue, the engagement has already been compromised.
To meet regulatory requirements and deliver high-quality outcomes, your firm needs a scalable modern technology platform that can unify data, automate workflows, proactively detect compliance issues, and provide real-time visibility into quality control across your entire organization.
To achieve SQM compliance, firms should look for platforms that can:
- Centralize, standardize, and automate processes across all firm locations and practices
- Integrate data from conflicts, independence, and acceptance and continuance systems
- Flag potential compliance violations in real time
- Provide dashboards and audit trails that deliver the visibility regulators expect
Why an effective SQM is about more than compliance
The firms getting SQM right experience benefits that go far beyond avoiding compliance violations. With a modern SQM framework and tech platform that prioritizes data quality and automation, they’re able to:
- Proactively manage risk instead of reactively fighting fires
- Boost efficiency and free up time for more revenue-generating work
- Continually monitor firmwide systems of quality control
- Make data-driven quality improvements
- Increase job satisfaction and employee retention
- Use consistent, defensible decision-making processes
Many of these benefits don’t just resonate with regulators — they also build trust with clients and differentiate you from your competitors.
Create a foundation for growth
A compliant SQM is more than a box your firm needs to check — it’s the foundation of a modern auditing practice. With the right foundation in place, your firm can get the insights it needs to make smarter, more strategic client portfolio decisions that mitigate risk and accelerate firm growth.
Learn about the modern tech solutions top accounting firms are using to power their SQM.
