MIA’s Remedial Action Plan applicable for audit firms with Type 3 rating aims to tackle continuing weaknesses in audit firms’ performance, in order to heighten audit quality and improve public trust.
By the MIA Practice Review Department
The Practice Review Programme of the Institute commenced in 2004 but there continues to be a high number of deficiencies in the audit firms’ quality control system and certain key areas of audit. This clearly signifies the complacency of the practitioners and the lack of emphasis placed on audit quality in their practices.
In its continual quest to enhance audit quality in the profession, the Institute implemented a new practice review framework effective 1 July 2017 whereby inter alia, the Remedial Action Plan (RAP) was incorporated for firms with Type 3 rating, to replace the conduct of the follow-up review as provided for under the previous framework. Firms are required to submit their RAP one month after receipt of the final practice review report duly approved by the Practice Review Committee (PRC). Addressing the audit quality issue requires constant work and attention; recalcitrant firms that are required to draw up their RAP are in effect, given the opportunity to be proactive rather than simply reactive in the process of identifying specific measures to induce improved audit quality in their firms.
Root Cause Analysis (RCA)
The success of the RAP hinges on each firm’s understanding of firmwide problems underlying the deficiencies identified during the practice review, instead of merely resolving the symptoms. What firms need to do really is to understand at a very fundamental level, what is hindering the realisation of an effective system of quality control. There is little doubt that practitioners know how to perform an audit, but the question is how to ensure the consistent execution of high-quality audits. Therein lies the challenge for practitioners to undertake an in-depth analysis of their firms based on the six elements of ISQC1 in order to identify root causes that detract from audit quality, be it in areas such as the firm’s structure, leadership, culture, policies and procedures, audit methodology and human resources. Performing a RCA is thus imperative to ensure that firms are able to formulate remedial plans that are targeted to address the relevant underlying deficiencies in the practice.
Remedial Action Plan (RAP)
Remedial measures vary based on the size, complexity and circumstances of each practice. Accordingly, the practitioners of the firm are well-placed to analyse, identify and design the most appropriate remedial actions that best fit the firm’s plan to address the deficiencies identified by the Practice Review Department (PRD).
The PRD has identified the following critical factors to be considered in the formulation of an effective RAP:
Practitioners must recognise that the remedial process is not a one-off exercise to satisfy the requirements of the Practice Review Programme but an ongoing, continuous project in the interest of elevating the audit quality of the firm. It is crucial to commence the remedial process early, maybe even after the discussion of the deficiencies with the PRD at the Practice Review closing meeting.
Analysis and identification of issues
Firms should devote considerable attention, time and effort to analyse the deficiencies identified during the Practice Review, and identify the root causes underlying the failure of the quality control system. The practitioners should engage with the PRD Reviewers to discuss the deficiencies specific to their firm, and to seek the Reviewers’ guidance throughout the remedial process.
Formulation of remedial actions
The rule of thumb for the formulation of a successful RAP is that ‘change is a necessary evil’ – policies and procedures that do not contribute to audit quality should be amended or even replaced as necessary.
In drawing up the RAP, firms must ensure that the remedial measures are relevant to the deficiencies identified and designed specifically to address the issue at hand. Avoid action plans that are too high-level and general as adequately detailed plans are critical to the effectiveness of the changes made. The RAP must be realistic, practical and achievable instead of just sounding good on paper.
Implementation of RAP
Given the time frame of three months to implement the RAP upon approval by the PRC, proper planning and prioritisation is essential to the successful implementation of the plan. The PRD Reviewers will conduct a monitoring review after the three months to determine whether or not the RAP has been implemented satisfactorily. It is suggested that firms compile and collate sufficient evidence on the effectiveness of action plans carried out during the implementation process in order to facilitate the monitoring review.
Monitoring of RAP process
The achievement of the audit quality objectives set out for the RAP requires real-time monitoring of the entire process by the practitioners. Appropriate yardsticks and milestones must be determined upfront so as to better enable the continuous assessment of the progress and effectiveness of the RAP. Timely adjustments should also be made to remedial actions that do not adequately address the identified deficiencies.
Practitioners must be committed to prioritise audit quality and the setting up of a reliable system of quality control for their practices. Firms should consider whether there are any insights arising from their root cause analysis whereby their quality control procedures could be enhanced to further improve audit quality. Firms will find that if proper time and resources are accorded to getting an audit in the right direction from the start, audit quality will permeate throughout the entire process and this will have multiple effects on client satisfaction, staff engagement, cost management etc. A robust system of quality control will not only provide a sustainable structure for ensuring consistency in audit quality but will also act as a catalyst to further drive productivity improvements in the way audits are conducted. Firms have to recognise that public accounting serves the public trust, and they have to be committed to doing quality audit work. MIA therefore would not hesitate to take stern enforcement actions against audit firms should errors continue to occur in their further review by the Practice Review Department.