Quality Assurance Building Effective Oversight Systems

1. Quality AssuranceBuilding Effective Oversight Systems Paul F.M. Hurks Director NBA International Accountancy (Royal NIVRA)

2. Quality Control & Quality Assurance Why do we need Quality Control (QC), and Quality Assurance (QA) for high quality financial reporting? Specificresponsibility of the profession Principlebasedstandards Assessments are highlyjudgmental Human behaviouralcharacteristics

3. Specific Responsibility: Public Interest IFAC/PIOB (PPP5) definition of public interest: “The net benefits derived for, and procedural rigor employed on behalf of, all society in relation to any action, decision or policy” Elements: Public (broad scope) Interests of the public (economic in nature, management of resources) Responsibility of the profession (in a large variety of roles) General assessments (cost/benefit; processes, trade-offs)

4. Principle based Standards Principle-basedregulation Code of Ethics (Attitude) ClarifiedISAs (Processes) ISQC1: Quality Control (Governance) SMO1: Quality Assurance (Enforcement) All assessments are highlyjudgmental

5. Code of Ethics (IESBA) FundamentalPrinciples: Integrity Objectivity Competence & Due Care Confidentiality Professional Behaviour (and Independence) Conceptual Framework Safeguards & Evaluation All assessments are highlyjudgmental

6. Clarified ISAs (IAASB) Standards for Auditing & Assurance An audit is an audit Principle-basedrequirementsforprocesses Requirementstointerprete in a case-systemic way Tailor made application All assessments are highlyjudgmental

7. ISQC1 (IAASB) (1) Standards for Quality Control Control: firms are required to design and implement a system of Quality Control, tailor made, according to the following concept: All assessments are highly judgmental .

8. ISQC1 (IAASB) (2) ObligationsforQuality Control Leadershipresponsibility Client relationshipsandassignments Human resources Engagement performance Monitoring Documentation All assessments are highlyjudgmental

9. SMO1 Quality Assurance (IFAC) ObligationsforQuality Assurance Implementation by the PAO of a Quality Assurance Review Program for Audit Engagements (minimum) of Financial Statements: “enforcement” For audits of listed entities (minimum) Best endeavours to encourage and assist other responsible authorities (government, regulators); Publish QC-standards and guidance (ISQC1) requiring firms safeguarding compliance with ISA 220 for audit professionals 3 or 4? levels All assessments are highlyjudgmental

10. When high quality FR is safeguarded? (1) Agency Theory for Audit & Assurance former (3 parties): client – shareholder – auditor current (4 parties): client – stakeholder – auditor – PAO, or current (5 parties): client – stakeholder – auditor – PAO - regulator (N.B.: stakeholder = public)

11. When high quality FR is safeguarded? (2) FR Infrastructure UNCTAD Capacity Building Framework Pillar A: Legal andRegulatory Frameworks Pillar B: InstitutionalFrameworks Pillar C: Human Resources Pillar D: Capacity Building Process

12. When high quality FR is safeguarded? (3) Why do we needoversightbodiesoverseeing PAO’sand auditors? Becauseregulationoften is onlyadopted, ‘notreally’ implemented, reflecting elements of: lack of awareness of the concepts lack of professional knowledgeand practical experience (techniques(science) versus judgements (art)) lack of substanceover form (mirror-approach) characteristicsof human behaviour (threats, pressures) Public society heardtoomuch of: “Allthis is notillegal” The profession is responsibleforreliability It is allabout TRUST

13. When high quality FR is safeguarded? (4) Cascade effect of IFAC development program influencing attitude - IFAC: SMO’s, CAP - PAO: QA, CPD, including Regulator - Firm: QC, dailypractice - Client: ethicalbehaviour, CSR

14. When high quality FR is safeguarded? (5)

15. Challenges for PAO development (1) Development categoriestowards “Center of Excellence” Managerial support (business model, governance, practices) Technical support (rules, regulation, tools, guidance) Intellectual support (ethics, values, mindset, principles, attitude, concepts, judgment)

16. Challenges for PAO development (2) • Quality Control (firm) • Concept of ‘Public Interest’ • Definition of ‘Quality’ • Concept of ‘Control’ • Ethics & Attitude • Nature of clients • SolePractitioners • Competence • Practical Experience • Judgments • Availability of tools (IT) • Language • Transparency • Quality Assurance (PAO) • Nature of PAO • Legal environment • Governmentsupport • Size of the profession • Competition (clients/tools) • Requirementsreviewers • Authorityreviewers • Judgments • SMO1 business model • Language • More PAOs • Transparency

17. Challenges for PAO development (3) Whatcan we do improve QC and QA practices? Step by step approach: 5 years(usuallyitwill take at least double time): Year 1: legalframeworkandregulation (international, convergence) Year 2: education & CPD (QC, QA, auditing) Year 3: design of Firm’s QC manual (customized) Year 4: performassignmentsaccordingly (documentation) Year 5: first time availability of audit documentationfor review*) *) recommendationto start reviews earlierfor the learningprocess

18. Lessons Learned (1) Whatcan we do improve QC and QA practices? Educationand training:tone at the top, mindset, attitude, public interest, quality, control concepts, professional skepticism, unbiasedjudgment, awareness of individual/collective professional responsibility, practiceexamples, transparency; Firms, big & small:tone at the top, culture, recruiting, promotion, incentives, training on the job, macro-responsibility, governance code; Audit regulation:visualize in documentation, reviews, monitoring, liability; Ethicsregulation:implementation of CoE,substance over form; Guidance: best practices, lessionslearned, war storiesandsuccessstories, whistleblowers, IFAC tools; Clients, big & small: review culture, CSR, governance, audit committee, transparency; Government: support, legislation, collaboration (donor support) Academia:further research.

19. Lessons Learned (2) Whatcanbedonetoimplement QC and QA? Step by step approach followinglocaleconomydevelopments Patience: the 5 yearstrategy (at the minimum) Start self assessments and QA-reviews early in the process (learning) Accept learningprocess of all stakeholders involved (coaching) Liaison withgovernment / regulator (combine competenceandauthority) Joint effort (postponenamingandshaming, avoidduplication) Share experienceand /or collaborate cross border (language / size) Train members, reviewersand trainers (ttt) in QC, QA and audit practice Make availablesufficient tools (IFAC andlocal; locallanguage, IT-based) Start easy; postponeperfection; manage expectations Design proper (country-) business model for QA (viability) Includeassuranceandrelated services in the reviews (learning, viability) No onesize fits all > customizedsolutions

20. Conclusions (1) Elements are essentialfor accountants/auditors in a large variety of rolesand environment: In allrolesand services: Preparer, Assurance provider andOversight; In all environments and sectors: from PIE to SME environment; in Private Sector and Public Sector Joint effort: Government support in PAO developmentfacilitates donor support

21. Conclusions (2) Professional: > contribute to reliable FR Profession: > contribute to effective and efficient markets “High quality financial reporting will not create economic growth, but for creating economic growth you cannot do without it*)” *) quote Ian Ball IFAC CEO

22. Thank you for your attention .