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Self regulation: an assessment by SECPS members.

Members of the American Institute of CPAs division for CPA firms SEC practice section (SECPS) believe the SECPS quality control (QC) program and membership requirements are effective in fostering and improving the quality of member firms' audits. They strongly support self-regulation as an alternative to government regulation. This suggests the profession's self-regulatory efforts are having the desired effect. QC program development Allegations of audit failures and concerns about financial reporting fraud underscore the importance of the profession's efforts to develop a QC program and communicate its effectiveness. Critical elements in carrying out these processes are the SECPS and the Public Oversight Board (POB), which evaluates SECPS activities and communicates its conclusions to the Securities and Exchange Commission, Congress and other interested parties. The SECPS activities on which the POB focuses are peer reviews of members and reviews of alleged audit failures by the quality control inquiry committee.

To provide a basis for additional communication on the effectiveness of QC programs, the SECPS commissioned a survey of member firms. Member self-assessments are important because if members themselves do not believe QC works, it is unreasonable to expect the public to do so.

The survey was designed to obtain evidence about current QC practices, member opinions of these practices and estimates of the costs of continuing professional education, peer review and internal inspections. The questionnaire was sent to 183 of approximately 1,200 SECPS members; the response rate was 67%.

Note: This article reports only on certain parts of the survey; complete details are available in monograph form. Survey results The survey results showed SECPS members believed QC methods, including internal inspections and peer reviews, are

* Vital to the profession's reputation.

* Effective in maintaining audit quality.

* Very expensive, but generally worth the cost.

Members were quite satisfied with the benefits of complying with QC standards and SECPS membership requirements. SECPS members believe

* The quality of all member firm audits has improved.

* The quality of the audits performed by the responding member firm has improved.

* QC practices and policies remain effective once in operation.

* Membership requirements and QC are more effective than sanctions in reducing the risk of audit failure.

* Membership requirements and QC enhance the profession's reputation.

A major reason for the positive opinions of QC was the inspection process whereby annual internal inspections and triennial peer reviews are performed. As a result of one or both of these processes, members said

* Individual performance has improved.

* Required remedial efforts progressively decline with each successive inspection.

* Repeated comments on needed corrections are rare.

In addition, positive changes in practices were reported as a result of internal inspection by 23% of the members and as a result of peer reviews by 33%, including positive changes in

* Specific CPE courses or course content.

* Client acceptance procedures (generally to increase their formality, add documentation and obtain higher levels of approval for high-risk situations).

* Audit documentation practices (particularly changes in requirements for and documentation of reviews).

* The quantity and quality of documentation for hiring, assignment of personnel, independence requirements and consulting.

These were some of the opinions on why internal inspection and peer review programs were effective:

* They result in an improved understanding of the nature of QC and the manner in which QC systems are implemented.

* They provide a forum for the exchange of ideas with other offices in the case of internal inspections and other firms in the case of peer reviews.

* They require preparation that provides a structured approach and motivation to allocate time for assessing the member firms' systems and personnel.

* Internal inspections and peer reviews are an effective means of identifying matters needing improvement and assessing the degree of compliance with QC.

Additional information

The survey provided a variety of additional information. Particularly informative was the large number of firms reporting they had declined clients in the past year. QC standards require explicit consideration of the suitability of all new clients. Exhibit 1, page 20,[TABULAR DATA OMITTED] shows the percentage of respondents offering each of several reasons for declining clients.

Responding members held strong opinions on the importance of QC to maintaining the profession's current structure. The QC process was strongly preferred to outside regulation and was viewed as a vital means of avoiding such regulation.

The questionnaire requested cost estimates for internal inspections and peer review. Many members had difficulty providing the information. As a result, estimates might have been understated. Annual inspection costs for the SECPS were estimated at $25 million, and triennial peer review costs were estimated at $19 million. CPE costs also were estimated and totalled more than $450 million. When asked if the benefits of SECPS membership exceeded the cost, members responded positively, but there was some diversity of opinion on the matter, as shown in exhibit 2[TABULAR DATA OMITTED], above.
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Article Details
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Title Annotation:AICPA's SEC practice section
Author:Prawitt, Douglas F.
Publication:Journal of Accountancy
Date:Jul 1, 1993
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