Quality control for tax practices.

From The Tax Adviser:

Tax Practice Reviews

ll businesses (including CPA practices) need to ensure that the quality of their work meets certain standards and they can document what they do and how they do it. Generally, this process is called “quality control.”

For accounting firms involved in tax practice, this has taken on new significance with the recent adoption of enforceable statements on standards for tax services (SSTSs) (see Official Releases, JofA, Oct.00, page 139). Now more than ever, it is important for CPAs to examine and evaluate the quality controls in their tax practices. One of the best ways to help ensure that a tax practice is of high quality and meets industry standards is through a tax practice review (TPR).

GOALS OF A TPR

There is no perfect method of managing a tax practice—no way to assure correct decisions by all of a firm’s practitioners all of the time.

A TPR can be used to determine whether a firm’s practice procedures are in accordance with certain standards, whether the firm complies with those procedures and whether the quality of the firm’s practice is sufficient (based on a sampling of its work). Quality can be measured by whether the work done by the firm responded directly to the client’s needs, was substantively correct, was documented in the files and was communicated to the client in understandable form.

All the facets involved in operating a tax practice are examined in a TPR, including the practice’s technical and managerial aspects and its pricing of services and engagements, marketing to clients (both current and potential), timeliness of service, development of new services and use of staff (both professional and support).

A TPR can take any form, whether it is an internal self-assessment or an external firm-on-firm review.

WHAT'S NEEDED FOR A TPR?

A quality control document should be developed to serve as the standard against which the work of the firm’s professionals can be measured. While many firms have such documents for their accounting and auditing practices, similar benchmarks for tax practice need to be established.

As part of this document, a tax procedures manual should be developed. This should include tracking procedures, checklists and return review procedures. The goal of the manual is consistency: It should detail the steps and manner of how all the firm’s members provide tax services.

The best way to develop such a manual is to set down in writing the firm’s tax procedures and why they were developed.

BENEFITS OF A TPR

In general, there are many benefits to be gained from reviewing a firm’s practice:

• A TPR provides a systematic approach to evaluating quality.
• A review can identify issues that may be missed or not adequately addressed in normal tax engagements.
• Better quality control reduces the risk of error and, thereby, exposure to malpractice claims. In addition, it may help a firm qualify for discounts in liability insurance and provide a possible defense in certain legal actions.
• The exposure to penalty, sanction or disciplinary proceedings by the IRS, the Treasury and/or state boards of accountancy can be reduced.
• A firm can evaluate its procedures and select those that establish “best practices” and ensure compliance with the SSTSs.
• Procedures that are set forth in company documents and materials but are not being followed in practice are identified.

For a discussion of tax practice reviews, see the Tax Practice Management column, edited by Steven Holub, in the December 2000 issue of The Tax Adviser.

—Nicholas Fiore, editor
The Tax Adviser