How to avoid common pitfalls of practice quality reviews

While some in accounting see the regular quality reviews by the Institute of Public Accountants (IPA) as a compliance check, it is actually far more valuable than that, says Erik Hopp, Senior Adviser at IPA.

“It’s all about quality of service to the client,” says Hopp, who has also held senior roles within ASIC, Deloitte, Victoria Auditor General’s Office and the Tax Practitioners Board.

“If a practice has high-quality internal management processes, it is more likely to attract quality clients, and more clients will also  want to be serviced by the practice,” he says. “It gives clients the confidence to deal with your business, and gives the public greater trust in the accounting profession.”

Hopp notes the reviews and the standards they uphold don’t just maintain public trust, they  also fulfil the profession’s public interest obligation.

“If we can ensure everyone is receiving professional services delivered ethically, it benefits the client, the practice and society as a whole.”

How does a review work?

Practices that offer a service to the public must undergo a quality review at least once every three to five years. As a member of the International Federation of Accountants (IFAC), IPA has an obligation to carry out such checks and, sometimes, to do so more frequently.

“Reviews may occur more frequently where IPA receives complaints from clients or regulators have raised concerns about a practitioner’s conduct,” Hopp says. 

For practitioners who audit financial statements and SMSFs, quality reviews are more frequent – a minimum of once every three years.

In terms of the process, a notification is sent out to practitioners in advance to remind practitioners of the key aspects of the review. It will typically highlight the need for the practice to have up-to-date quality management and risk management manuals. The practice must also ensure its professional indemnity insurance is current and at the correct level of cover. In addition, evidence is required of the practice’s other compliance obligations, such as the need to ensure trust accounts are audited within three months of their balance date.

“The reason IPA provides practitioners with advance notification is not to spring a ‘gotcha’ on a practice,” Hopp says. “Rather, we’re trying to help the practice ensure it has a modern, effective practice methodology that ensures quality services are provided to clients in line with an accountant’s public interest obligations.” 

The main pitfalls during quality reviews

If you’re being reviewed, Hopp says, a little apprehension is good if it helps you prioritise and focus on checking your house is in order. You will need to take the time to make sure all of the relevant processes and policies are up to date and recorded as they should be.

“Those who have sat on their laurels since the last review have a right to feel more apprehensive,” he says. “Professional standards, technical accounting/audit requirements and taxation laws are constantly changing, and if you’re not keeping up then you may have more significant work to do.”

One of the clearest red flags for reviewers, apart from a lack of quality management and risk management manuals, is insufficient professional indemnity (PI) insurance. There is an important reason that this is taken very seriously.

“PI insurance is very sensitive,” Hopp says. “A benefit of being part of a professional standards scheme is that practitioners enjoy limited liability on condition they comply with the requirements of the scheme.”

Liability caps, as outlined in IPA’s 2022-2026 Professional Standards Scheme, have been set at $2 million and $10 million, depending on a practice’s fee income/turnover. Businesses with fee income (excluding GST) of $10 million or more will be on the higher liability cap. All practitioners must have PI insurance that covers them up to their liability cap.

“If a practitioner holds an adequate PI insurance, the liability cap operates as designed,” Hopp says. “However, if you don’t have adequate PI insurance, your liability may be viewed by a court to be unlimited.”

What does good quality look like?

Businesses that cruise through their quality reviews, Hopp says, have good systems in place. They have ongoing, relevant training for their staff. They regularly review and update their quality management manual and risk management manual.

In businesses with enough resources, a specific individual is often responsible for overseeing such matters. 

“That person usually takes care of all the procedures and methodologies,” Hopp says. “They make sure the practice software is up to date, and they stay abreast of changes in standards, technical updates and related practice management tools.”

Hopp also lists annual reviews of practice management policies, complemented by ad hoc updates, as a practice of high performers. 

“When the practice receives complaints from clients, they go back and check their policies and procedures and update them, to mitigate the same type of complaint recurring,” Hopp says.

They also stay on top of the vital continuing professional development (CPD) requirements, as outlined in the IPA’s Pronouncement 7 CPD document.

It’s undoubtedly more difficult for micro and sole practitioners to continuously run the same level of hygiene checks, Hopp says. However, the IPA has developed several resources that smaller practices can use to streamline their efforts.

“For the smaller practitioner, many of the policies and processes may be in your head, but they do have to be written down,” he says.

“We do empathise with smaller practices as it can be challenging. That’s why we have provided tools and guidance on our website specifically written for them. We have provided templates that can be tailored to their practice, and we have provided much of the sample wording to satisfy the ethical and professional standard obligations.”

These tools can be found in the Practice Management Tools section of the IPA’s website.

Getting quality reviews right, Hopp says, is vital for a number of reasons. As recent issues among the big four firms have demonstrated, one bad apple can spoil the whole bunch.

“We’re trying to lift the performance of all practices, provide better service to clients, and continue to raise the perception of the whole accounting profession upwards,” he says. 

“If we ensure good practice standards and keep our profession, as the title suggests, professional, we will continue to uphold the much-valued ‘trusted adviser’ status in the community.”

The IPA has developed templates, samples and more to help smaller practices remain compliant and reduce risk. IPA members can find these resources in the Practice Management Tools section of the IPA’s website.