Governance and leadership and the roles SQMS No. 1 requires

In this lesson you will

Assign ultimate and operational responsibilities required by QM 10.21
Evaluate whether assigned individuals have the experience, authority and time required
Apply the governance and leadership quality objectives in QM 10.29
Plan the periodic performance evaluations required by QM 10.57

Who is responsible

QM 10.21 requires the firm to assign:

ultimate responsibility and accountability for the system to the CEO or managing partner (or equivalent), or, if appropriate, the managing board of partners;
operational responsibility for the system; and
operational responsibility for specific aspects, including compliance with independence requirements and the monitoring and remediation process.

One person can hold more than one role in a small firm. In a sole practitioner firm the practitioner holds all of them.

QM 10.22 requires the firm to determine that each assigned individual has the appropriate experience, knowledge, influence and authority within the firm and sufficient time, and understands the role and is accountable for it. QM 10.23 requires the individuals with operational responsibility for the system, independence and monitoring to have a direct line of communication to the individual with ultimate responsibility.

The "sufficient time" condition catches many firms. A partner who carries a full client load through busy season and is also the quality management leader may not have time to run the system. Document the time allocated, not just the title.

Governance and leadership objectives

QM 10.29 sets the quality objectives for this component:

The firm demonstrates a commitment to quality through a culture that recognizes and reinforces its role in serving the public interest by consistently performing quality engagements; the importance of professional ethics, values and attitudes; the responsibility of all personnel for quality; and the importance of quality in strategic decisions and actions, including financial and operational priorities.
Leadership is responsible and accountable for quality.
Leadership demonstrates a commitment to quality through its actions and behaviors.
The organizational structure and assignment of roles, responsibilities and authority are appropriate for the system.
Resource needs, including financial resources, are planned for and resources are obtained, allocated or assigned consistently with the commitment to quality.

The governance and leadership component establishes the environment that supports the whole system (QM 10.29). Typical quality risks: partner compensation driven only by billings and realization; leadership tolerating late file assembly by a rainmaker partner; or a budget that leaves no money for audit software updates or training.

Responses that work

Partner evaluations and compensation that include quality measures such as inspection results, peer review findings and timeliness of documentation.
Leadership communications that address quality in concrete terms, such as how the firm handled a declined engagement.
A documented organizational chart showing the quality roles and their reporting lines.
A budget line for quality management resources approved by the partners.

Evaluating the leaders

QM 10.57 requires periodic performance evaluations of the individuals with ultimate and operational responsibility for the system, taking into account the evaluation of the system. If the system has a severe deficiency, the managing partner's evaluation reflects it.

Common implementation problems

Ultimate responsibility assigned to a quality partner instead of the managing partner.
No evidence the assigned individuals have time for the role.
Partner compensation criteria that never mention quality.
No performance evaluation of the quality leaders.

See the SQMS No. 1 guide and the AI governance framework for CPA firms for how governance extends to new technology.

Worked example

Ashford Lane CPAs: are the roles assigned properly?

Ashford Lane CPAs has 6 partners. Its draft quality documentation says:

Ultimate responsibility: the audit department head (not the managing partner).
Operational responsibility for the system: the same audit department head.
Independence: the firm administrator, who reports to the operations director.
Monitoring and remediation: an outside consultant who performs inspections.

Partner hours budget: the audit department head has 1,900 chargeable hours budgeted and 40 hours for quality management.

Evaluation against QM 10.21-.23:

Ultimate responsibility must sit with the managing partner (or equivalent) or the managing board, not a department head. Fix: assign it to the managing partner.
The independence role must have a direct line to the individual with ultimate responsibility. Fix: the firm administrator reports to the managing partner on independence matters.
Monitoring may use a service provider, but someone in the firm must hold operational responsibility for the monitoring and remediation process. Fix: assign it to a partner who oversees the consultant.
Time: 40 hours a year is not plausible for running the system in a 6-partner firm with an audit practice. Fix: reduce the department head's chargeable budget by 200 hours and record the allocation.

The revised assignments, time allocations and reporting lines go into the system documentation required by QM 10.59a.

Self-check

Answer each question before you open the answer.

Who must hold ultimate responsibility and accountability for the system of quality management?
Show answer
The firm’s CEO or managing partner (or equivalent) or, if appropriate, the managing board of partners (QM 10.21a).
Which specific aspects must have assigned operational responsibility?
Show answer
Compliance with independence requirements and the monitoring and remediation process, in addition to operational responsibility for the system as a whole (QM 10.21b and c).
Why does partner compensation matter to governance and leadership?
Show answer
QM 10.29a includes the importance of quality in the firm’s strategic decisions and actions, including financial and operational priorities. Compensation that rewards only revenue creates a quality risk that the firm must address.

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error