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TQM and CPA firms.

The introduction of mandatory practicemonitoring programs has drawn increased attention to the issue of quality control in CPA firms. In 1988, American Institute of CPAs members approved a bylaw amendment requiring all AICPA members active in the practice of public accounting to be associated with an AICPA-approved practice-monitoring program. Beginning in 1990, members effectively required all CPA firms with publicly traded audit clients to participate in the self-regulatory programs of the SEC practice section of the AICPA division for CPA firms.

Regular quality or peer reviews are key elements in this self-regulatory process because they help improve a firm's quality control system and pinpoint areas for improvement. Most firms' systems consist of quality control policies and procedures, annual inspections for compliance with them and periodic quality or peer reviews.

Although these steps and annual performance appraisals are essential components of an effective quality control system, a CPA firm can enhance its reputation and gain a competitive advantage by aiming even higher than the minimum quality requirements set by current professional standards. This article proposes extending the firm's quality control program to provide comprehensive and ongoing evaluation of both external and internal customers by applying the principles of total quality management (TQM) (see exhibit 1 on page 60[TABULAR DATA OMITTED]).


Unfortunately, annual inspections and periodic reviews conducted in accordance with current standards have two inherent limitations.

1. They are designed to identify weaknesses and deficiencies only in performance and are not structured to address existing, ongoing problems. Therefore, any improvement in a firm's quality control system resulting from inspection or quality or peer review may come too late to prevent serious damage. An inadequate quality control system can result in fines, suspensions or expulsion from the AICPA and may damage the firm's reputation, diminish public trust and lead to costly litigation.

2. Quality or peer reviews are aimed at the needs of external customers (clients); they do not incorporate the needs of internal customers (staff) into the overall quality control process. Issues affecting the firm's professional staff usually are reviewed in annual employee performance evaluations, but, again, these evaluations often come too late to prevent problems. Failure to address professional personnel needs promptly can increase employee turnover, lower morale and reduce the firm's overall productivity.


TQM has its origins in manufacturing, where statistical quality control measures were first used to reduce product defects. Today, TQM incorporates both a management philosophy and a growing body of tools and techniques for continuously improving products and services. TQM concepts have been applied in government, education and a wide variety of service industries, including banking and insurance. TQM also is being applied to auditing and accounting services.

TQM recognizes that quality cannot be added to a product or service after it's completed but must be designed into the work process from the beginning. Its management philosophy incorporates at least three major concerns.

1. TQM focuses on the work process, not the employee. If work quality is poor, say TQM advocates, the most likely cause is a poorly planned or implemented work process. TQM is based on the premise that most employees will do a good job if the work process permits and supports it.

2. TQM focuses on customers. Every employee or functional group in a business organization has its own customers, both internal and external. TQM gives customers the opportunity to define work process quality in terms of their own requirements (that is, what they want, need and expect from the supplier of a good or service). The goal is not to meet customer expectations but to exceed them.

3. TQM focuses on teamwork rather than individual effort. It empowers all employees, from clerical staff to managers, to contribute to the process of continuous quality improvement. It seeks to remove barriers that divide employees into staff and management since staff-level employees often are the first to recognize critical areas for quality improvement.


This TQM philosophy is put into practice through a set of techniques that include

* Identifying customers and customer requirements.

* Relating those requirements to the work process.

* Regularly measuring work activity against customer requirements.

Customers and their requirements. The cornerstone of the TQM approach to continuous quality improvement is identifying the customer for a given activity or work process and determining specific customer requirements. Who is the customer for a CPA firm's quality control program? Ultimately, of course, it's the firm's clients and the public at large that benefit from high quality auditing and accounting services. But an equally important customer for the firm's quality control program is the firm itself, including its staff. The CPA firm ultimately reaps the benefit of improved quality control in the form of higher revenues as a result of increased client retention and market share and lower costs through the avoidance of errors, sanctions and penalties.

A CPA firm's quality control program must, at a minimum, adhere to AICPA quality control standards, which are described in Statement on Quality Control Standards no. 1, System of Quality Control for a CPA Firm. The statement contains specific guidelines for reviewing and implementing the necessary quality control policies and procedures and evaluating CPA firm engagements on the basis of professional standards.

Using requirements to improve the process. CPAs should begin by documenting the firm's current quality control process. Many important work processes are routinely documented in policy and procedure manuals using flowcharts and narratives. Existing documentation can be used if it's adequate, but the work process steps documented should include all major work activities. Next, CPAs should compare the existing quality control system to customer requirements and change it to meet or exceed them. Customer requirements can be determined through a variety of techniques, including surveys, personal interviews and analyses of customer comments and complaints.

Measurement points. Ongoing measurement and evaluation are the most crucial steps in TQM. To control any work process, including quality control, the firm must be able to measure its ongoing effectiveness. Without measurement, there can be no quality control.

The goal is to identify quality control measurement points that will allow the firm to detect and prevent substandard performance before customer service is impaired. For many work processes, finding timely measurement points may require considerable effort and ingenuity. In practice, development of measurement tools and techniques often is delegated to quality improvement teams (in a small firm, the entire firm might be recruited onto this team). Members should include those with authority over a work process as well as those directly affected by it. To be effective, team members must be able to work together as equals; otherwise, ideas and suggestions for improving quality control may never be expressed.

Exhibits 2 and 3 on pages 61 and 62[TABULAR DATA OMITTED] illustrate how TQM might be used to strengthen a CPA firm's overall quality control program. Both exhibits are directed toward one element of quality control for CPA firms--professional development (the nine elements of quality control are listed and explained in Statement on Quality Control Standards no. 1). Exhibit 2 focuses on the needs and expectations of external customers (clients); exhibit 3 considers the needs of internal customers (professional staff).


The TQM process can be effectively extended to include all areas covered by quality or peer review. Using TQM methods, CPA firms can improve their quality control systems by identifying customer needs, designing work processes to meet them and creating timely measures to prevent and correct substandard performance before costly mistakes occur. By providing ongoing feedback and evaluation, TQM overcomes the inherent limitations of inspection and quality or peer review and provides a system that enables practitioners to identify and exceed customer expectations.

Successful application of TQM requires a long-term commitment to continuous quality improvement, starting at the top of the organization. TQM is not a quick fix for quality control problems but, rather, a long-range strategy that ultimately will enhance the firm's reputation, increase revenues and reduce costs.


* A CPA FIRM CAN ENHANCE its reputation and gain a competitive advantage by using the tools and techniques of total quality management (TQM) to aim even higher than the minimum quality requirements set by current professional standards.

* TQM'S FIRST STEP is to identify customers--including internal customers, such as firm members or the firm itself--and determine their specific requirements (what they want, need and expect from a supplier). The goal is not to meet customer expectations but to exceed them.

* CUSTOMER REQUIREMENTS are used to improve the work process. TQM recognizes that quality cannot be added to a product or service after it's completed but must be designed into the work process from the beginning.

* MEASUREMENT IS a cornerstone of quality control. Firms regularly measure work activity against customer requirements to permit ongoing evaluation and change.
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Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:total quality management in accounting firms
Author:Thibadoux, Gregory M.
Publication:Journal of Accountancy
Date:Jul 1, 1993
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