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cpa consultant
What CPAs Need to Know
About Quality Control Assurance Systems
By Jacqueline A. Burke and
Ralph S. Polimeni
T
he word “quality,” meaning superiority or excellence, has long
been used by organizations to
describe their product or service. According
to The Complete CFO Handbook (Frank
J. Fabozzi, Pamela Peterson Drake, and
Ralph S. Polimeni, Wiley, 2008), product
or service quality consists of three elements: quality of design, quality of
conformance to design, and quality of performance. Quality of design refers to the
product’s adherence to appropriate specifications, such as required product life,
fatigue resistance, customer service expectations, and government-mandated safety
requirements. Quality of conformance is
the extent to which products manufactured
and services provided adhere to quality
design specifications. Quality of performance is affected by both the quality of
design and conformance to design, which
together determine the overall quality of
the product or service.
The purpose of this article is to inform
(or refresh) CPAs about a quality control
assurance system so that they can be in the
position to alert businesses, should the need
arise, to consult with an expert. Fabozzi,
Peterson Drake, and Polimeni (2008)
define a quality control assurance system
as “a continuous system of feedback necessary for decision making to assure optimum product quality” (p. 762). Having a
basic understanding of quality control
assurance systems will also enable CPAs
to discuss basic issues with a quality control specialist and management.
A quality control assurance system can
also be viewed as part of an organization’s
internal control system. A major objective
of internal controls is to establish procedures to protect an organization’s assets.
An ineffective quality control assurance
56
system directly impacts the organization’s
assets. Excessive rework costs and spoiled
units lead to higher costs and inefficient
use of an organization’s resources. An
internal audit should incorporate a peri-
employee training costs, frequent equipment recalibration and servicing costs, and
employee quality incentive programs costs.
I Failure costs—costs to correct a defective product, including rework costs, war-
odic review of an organization’s quality
control assurance system to enhance that
part of its internal control system.
ranty repair costs, packing and shipping
costs, and product liability costs.
Both prevention/appraisal costs and failure costs often work in inverse fashion.
(That is, an increase in spending on prevention/appraisal costs should yield fewer
defects, resulting in lower failure costs. The
opposite is also true; spending less on
prevention/appraisal costs should result in
more product defect costs.) As a result,
many companies don’t strive for zero
defects but instead seek to find the best
spending level for both cost groups,
Quality Obstacles
Some of the roadblocks to the achievement of product quality are described
below.
One issue is quality costs, which can
be viewed as two separate conflicting costs:
I Prevention/appraisal costs—costs
incurred by an organization to prevent
defects, examples of which include
JANUARY 2012 / THE CPA JOURNAL
thereby minimizing total quality costs (prevention/appraisal costs plus failure costs).
Because zero defects is not the target in
this practice, product quality will suffer.
Product quality can also suffer when an
organization lowers production costs to
increase profits and lower its prices to compete against increasing competition. It’s the
nature of manufacturing companies to seek
ways to reduce costs during the production
process without sacrificing quality. Cost
reduction is acceptable and desirable if it
does not compromise quality and, most
importantly, safety.
Quality problems are not only related to
efforts to reduce costs, but can also occur as
a result of design and conformance to design
problems. Design relates to the technical
requirements of a product (e.g., the gauge
of steel to be used in a product), whereas conformance relates to adherence to a design
(e.g., use of the correct gauge of steel in the
manufacturing of the product). An excessively quick increase in production can lead
to quality problems. For instance, assembly
workers might work too quickly to reach
unrealistic production output goals, resulting
in poorly assembled products.
To overcome these quality obstacles,
organizations need to provide a greater
focus on controlling product quality. Many
organizations, at least on paper, subscribe
to what is known as total quality management (TQM), which means that an organization takes a company-wide approach
to achieve the highest level of customer
satisfaction with its product. What is necessary for an organization to achieve
TQM? Today’s efforts to attain product
quality have evolved into a quality control assurance system that engages all levels of an organization. The responsibility
for maintaining an organization’s product
quality is no longer limited to the quality
control department. An effective, company-wide quality control assurance system
is critical to reducing product defects.
eral, wide-ranging statement of scope, philosophy, and strategy that provides a general sense of identity for the organization.
In addition to a company-wide mission
statement, a company should have a quality mission statement. The quality mission statement should state the organization’s quality philosophy (i.e., values)
regarding the role and importance that a
company places on the achievement of
EXHIBIT 1
Quality Control Assurance System
Quality Mission
Statement
Component 1
Implement
Improvements
Component 5
JANUARY 2012 / THE CPA JOURNAL
Quality Goals and
Objectives
Component 2
Quality Control
Department
Component 4
Map Quality Goals
and Objectives
Component 3
EXHIBIT 2
Greene Corporation
Divisions and Product Lines
Quality Control Assurance System
Exhibit 1 represents key components in the
design and implementation of a quality control assurance system. As can be observed,
the process is a continuous loop of ongoing
efforts to improve product quality.
Component 1: quality mission statement. An organization’s company-wide
mission statement is normally a very gen-
product quality. Some organizations create
a separate quality mission statement for
their company, while other companies integrate its quality mission statement into
the organization’s overall company-wide
mission statement. All levels of management should be involved in the creation
of a quality mission statement, and employees should also be consulted to create an
organizational buy-in.
Power Tool Division
Hand Tool Division
Gas engine lawnmowers
Hand clippers
Gas engine chainsaws
Rakes
Shovels
Wheelbarrows
57
The quality mission statement could be
organization-wide, that is, applicable to
all divisions. Alternatively, some organizations prefer to have each division
develop its own, more specific, quality mission statement.
A case study will be presented for a
medium-size garden tool manufacturer
named Greene Corporation. Greene
Corporation has two divisions—power
tools and hand tools. Exhibit 2 lists their
divisions and product lines. Exhibit 3
shows the company-wide mission statement, and Exhibit 4 shows the quality mission statements created by each division of
Greene Corporation. Greene Corporation
chose different quality mission statements
for its two divisions because defective
power tools could result in more customer safety problems than hand tools.
Once the quality mission statement is
developed and approved by the organization, the company can then develop its plan
to achieve the mission.
Component 2: quality goals and
objectives. Quality goals and objectives
should be developed to achieve the organization’s quality mission. The quality
goals state the results the organization
expects to achieve and are often a more
detailed version of its general quality mission statement, while the quality objectives indicate what needs to be done to
demonstrate the accomplishment of the
quality goals. Each quality goal would
typically have several quality objectives
to accomplish that goal. Although the
number of quality goals and related
objectives is up to the organization, at
least one quality goal and related objective should be developed for each quality mission statement.
EXHIBIT 3
Greene Corporation
Company-wide Mission Statement
The mission of Greene Corporation is to develop, market, and manufacture power
and hand garden tools for homeowners while effectively utilizing our resources.
We specialize in garden tools, which is our only business.
Our strategy is to be a leader in the development and design of products that
conform to our customer needs.
Our philosophy is to manufacture the best tools possible at competitive prices,
and to consistently seek ways to provide improved value to our customers.
The mission will be conducted in an ethical manner in all aspects and activities
of the company.
EXHIBIT 4
Greene Corporation
Power Tool Division Quality Mission Statement
The quality mission of the Greene Corporation Power Tool Division is to ensure
that our products and technical support service provided to our customers are of
the highest level of quality achievable and shall provide the customer with a safe
and reliable product.
Hand Tool Division Quality Mission Statement
The quality mission of the Greene Corporation Hand Tool Division is to provide
customers with the highest product quality and customer service possible in
conformance with customer expectations and cost constraints.
58
Once again, all levels of management,
with employee input, should be involved
in the establishment of quality goals. Many
organizations have multiple product lines
and may have different quality goals for
each product line. For example, products
that can impact consumer safety (automobile braking systems) should have higher
quality goals than those that don’t (automobile sound systems). Quality goals for
the department responsible for the automobile braking system hopefully will have
a zero defects goal, while the automobile
sound system department might strive for
a maximum 2% failure rate. As previously discussed in the quality obstacles section, while every organization would like
to strive for zero defects in the production
process, this quality goal is not always costeffective.
Once quality goals are developed, quality objectives need to be created and
matched to a quality goal. Exhibit 5 is an
example of the quality goals and their related objectives for the two divisions of
Greene Corporation.
As shown in Exhibit 5, some organizations will have their divisions develop individual quality mission statements, goals,
and objectives. If this is the case, it is
very important that organizations ascertain
that the correct quality goals and objectives
have been mapped (i.e., traced) to the
appropriate individual production processes or departments.
Component 3: map quality goals and
objectives. Mapping is important in organizations that manufacture multiple products and have assigned different quality
goals and objectives for each division or
product line. The mapping process will
help determine if quality goals, and their
corresponding quality objectives, are
effectively communicated and implemented in the appropriate departments.
Continuing our example of Greene
Corporation, Exhibit 6 presents each division with its various departments and
acceptable level of defects based on their
quality mission statements, goals, and
objectives.
Note that in Exhibit 6, the Power Tool
Division expects zero defects for departments
1 and 3, which is in line with its Quality
Goal 1, “Employees will strive to produce
a quality product with no operating defects,”
whereas the hand tool division accepts a 2%
JANUARY 2012 / THE CPA JOURNAL
defect rate for departments 1 and 3, which
is appropriate for its quality goal 1,
“Employees will strive to produce the best
quality product possible within cost constraint
limitations.”
In the Greene Corporation example, it
was assumed that each department in the
organization was dedicated to producing
a particular part of a product. For example, department 1 of the power tool division produces gas engines for its lawnmowers and chainsaws. This structure
enables the department to strive for one
specific level of acceptable defects. In a
very small manufacturing company, with
limited resources, several different types of
production processes, with different quality goals, may have to coexist within the
same department. In cases like this, it
would be necessary to inform the department employees of the different quality
goals. For example, assume instead that
Greene Corporation is a very small manufacturing company with no divisions, and
that both its gas engines and cutting and
forming processes are performed in one
department. The employees of that
department would be informed that when
they produce gas engines, they need to
strive for zero defects, whereas it is acceptable to achieve a 2% defect rate when
cutting and forming hand tools.
Component 4: quality control department. An effective and efficient quality
control department is the heart of a quality control assurance system. An organization’s quality control (assurance) department normally serves in an audit capacity
and is responsible for the quality of a product and service from inception (purchase
of raw materials) to completion (shipment
of finished products). Some of the primary functions of a quality control department
are the following:
I Inspect and remove defective items
from the production process. The defective
items (from raw materials, work-in-process,
and finished goods inventories) are either
reworked (fixed to meet quality standards),
scrapped, or discarded.
I Continually review production specifications, methods, and procedures.
I Review production documents and
records for completeness and accuracy.
I Examine processes for enhancing
production specifications, methods, and
procedures.
JANUARY 2012 / THE CPA JOURNAL
I Review quality control manuals for
accuracy and completeness.
I Ensure that the latest manuals are available to quality control employees and are
being used at all times.
I Provide control quality reports to all
levels of management.
A dysfunctional quality control department is a serious problem and could severely impact the organization’s efforts to
achieve a quality product. Because of this,
internal auditors often perform operational
audits of a quality control assurance system,
with particular emphasis on the operations
of the quality control department.
In the Greene Corporation case, the quality control department would be kept in the
loop and consulted regarding any changes
to each division’s quality mission statements, goals, and objectives. This is important because the quality control department
needs to know where to focus its attention.
For example, departments 1 and 3 of the
power tool division would receive a high
priority regarding product inspection
because one of the quality objectives listed under quality goal 1 states that “all products coming off the assembly line
are tested for conformance to design
specifications.”
Component 5: implement improvements. Implementing improvements to
enhance product quality is the final component in a quality control assurance system. The expression “closing the loop” can
be used to define this component. The
entire quality control assurance system is
considered a loop because quality control
is a continuous process. The quality control department should work with various
department heads to analyze quality variances and advise them, where appropriate, on corrective measures. Management
has to be open to implementing suggestive
corrective changes to the production system to enhance product quality. The quality control department should follow up
to ensure that suggestions were implemented and resulted in an improvement
to the production process and product quality. For example, if it is discovered in
department 1 (gas engines) of Greene
Corporation’s power tool division that
some line production workers were not
properly trained, then a process should be
set in place to follow up on this deficiency until it is corrected.
Other Quality Control Considerations
Two other areas that CPAs should be
aware of relating to quality control are outsourcing and the Six Sigma concept.
Outsourcing. Many organizations have
been outsourcing a part or all of their production processes. Outsourcing production,
especially when done overseas (i.e., offshoring), makes it more difficult to maintain product quality. It is important that
organizations set quality standards for the
service provider (i.e., company the services
are being outsourced to) and set up a system to oversee that the agreed-upon standards are consistently being followed. One
way to do this is by requiring service
An effective and efficient quality
control department is the heart of a
quality control assurance system.
providers to be certified (i.e., accredited)
for compliance with International
Organization for Standardization (ISO)
9001. The ISO, a nonprofit organization,
is the world’s leading creator of international quality standards. According to the
British Standards Institute (BSI), ISO 9001
establishes a series of standardized requirements for a quality management system,
regardless of the size of the user organization, what it does, or whether it is a private or public company (www.bsiamerica.
com/en-us/Assessment-and-Certificationservices/Management-systems/Standardsand-schemes/ISO-9001/).
In order to obtain ISO 9001 certification, an organization must be audited and
certified by an independent certification
body. In the January 2010 issue of The
CPA Journal, in “Is Outsourced Data
Secure?” Renu Desai and Robert W.
McGee explain that ISO develops, maintains, and publishes the ISO standards.
However, the ISO does not actually audit
or assess quality management systems to
ensure that they are in conformity with the
requirements of the standards. Therefore,
59
the ISO does not issue ISO 9001 certification. Companies that seek ISO 9001 certification must do so through an independent certification body. For example, the
BSI provides this certification both in the
United States and other countries.
Requesting that your service provider is
ISO 9001–certified is a way to minimize
some of the risks of outsourcing.
Therefore, organizations concerned about
the quality of their products when outsourcing should try to limit themselves
to service providers that are ISO 9001–
certified.
It is important to note that ISO 9001 certification does not guarantee that a product
is of high quality. A company can be ISO
9001–certified and still produce an inferior product. However, it does send a
message to constituents that an ISO
9001–certified company strives to achieve
EXHIBIT 5
Quality Goals and Related Objectives
Power Tool Division
Quality Goal 1:
Employees will strive to produce a quality product with no operating defects.
Objectives to achieve Quality Goal 1:
Demonstrate that—
I procedures are in place to train and test employees in product assembly techniques,
I assembly equipment adheres to a strict maintenance schedule,
I all products coming off the assembly line are tested for conformance to design specifications,
I products are not returned by customers because of quality defects,
I a zero product recall rate has been achieved, and
Quality Goal 2:
The technical support staff will strive to provide customers with fast, courteous, accurate, and friendly assistance.
Objectives to achieve Quality Goal 2:
Demonstrate that—
I technical staff employees receive periodic updating and testing on existing product specifications;
I technical staff employees receive briefings, in a timely manner, on product problems and updates on new product lines;
I phone conversations with customers are monitored to assure fast, courteous, accurate, and friendly assistance; and
I technical staff employees consistently receive excellent evaluations on customer surveys.
Hand Tool Division
Quality Goal 1:
Employees will strive to produce the best quality product possible within cost constraint limitations.
Objectives to achieve Quality Goal 1:
Demonstrate that—
I analyses are periodically performed to improve production quality, efficiency, and reduce costs;
I sample testing is performed on products coming off the assembly line to determine conformance to design specifications;
I on-the-job training is provided for new employees; and
I at least a 95% customer product quality satisfaction rate is achieved.
Quality Goal 2:
The customer service staff will strive to provide customers with fast, courteous, accurate, and friendly assistance.
Objectives to achieve Quality Goal 2:
Demonstrate that—
I phone conversations with customers are monitored to assure fast, courteous, accurate, and friendly assistance; and
I customer service employees consistently receive excellent evaluations on customer surveys.
60
JANUARY 2012 / THE CPA JOURNAL
certain best practices in achieving and
maintaining a quality management system.
Six Sigma. This was originally developed by Motorola USA in the 1980s and
is a quality control management strategy.
The name Six Sigma came from the statistical modeling process that is used to
evaluate the production process. Basically,
Six Sigma attempts to minimize the
unevenness in a manufacturing process
by identifying and removing the causes of
defects. A sigma rating indicates the percentage of defect-free products it creates.
A Six Sigma process is one in which
99.99966% (3.4 defects per million) of the
products manufactured are statistically
expected to be free of defects.
In “In Pursuit of Implementation Patterns:
the Context of Lean and Six Sigma”
(International Journal of Production
Research, December 2008), authors R. Shah,
A. Chandrasekaran, and K. Linderman note
that although some view Six Sigma as simply a set of statistical techniques, it is often
viewed and implemented as a company-wide
approach to quality control. A Six Sigma
strategy emphasizes the attainment of
quantifiable financial targets.
Although originally used in the manufacturing industry, Six Sigma is now used
in the service industry, including the financial sector (Shaun Aghili, “A Six Sigma
Approach to Internal Audits,” Strategic
Finance, February 2009). Aghili further
explains that Six Sigma methodology has
evolved over time and, as a result, has—
allowed organizations to combine effective quality control with financial efficiency by helping management identify
various non-value-added processes that
can be eliminated, thereby improving the
company’s bottom line. That’s a concept
that should be especially appealing to
most organizations during the current
weak economic times.
Aghili notes that individuals can become
certified according to their levels of expertise
in Six Sigma. These Six Sigma specialists
are classified according to different “belt” levels, or, in other words, different levels of
expertise (i.e., master black belts, black belts,
green belts, and white belts).
Over the years, many industries have
adopted the concepts of Six Sigma. While
some view it as a fad, many companies still
use this method or some similar version.
Therefore, it would be useful for CPAs to
JANUARY 2012 / THE CPA JOURNAL
be aware of Six Sigma when working with
quality control assurance systems.
Service Organizations
Many of the concepts discussed above
also apply to service organizations. The
quality control assurance system is very
similar for a manufacturing and service
organization. The key difference is that a
service organization will focus on the quality of services delivered instead of the qual-
satisfied with the quality of customer service). In order to assess the attainment of
its goals and objectives, the quality control
department can provide customers with the
opportunity to take an automated phone
customer satisfaction survey at the end of
each phone call or repair service. Any suggestions for improvement should be evaluated and implemented when deemed
appropriate.
The CPA’s Role
An organization can take years to
develop a reputation for providing
quality products and services,
yet the reputation can sadly be
destroyed overnight.
ity of products produced. For example, a
quality control assurance system for a program transmission signal provider for televisions (i.e., cable, satellite dish) should
develop a mission statement and set goals
and objectives for customer service and the
quality of the organization’s transmission
signals. For instance, a goal for the customer service department might be to
obtain a high level of customer satisfaction
in customer service. The related objective
might be to achieve a 95% approval rating
from customers (i.e., 95% of customers are
An organization can take years to develop a reputation for providing quality
products and services, yet the reputation
can sadly be destroyed overnight as the
result of an ineffective quality control
assurance system. The achievement and
maintenance of a quality product or service should be the aim of everyone in an
organization. To help an organization
achieve this, CPAs should be cognizant
of and engaged in the quality control assurance system and refer to a specialist if necessary. To be effective in this capacity,
CPAs do not need to be expert in quality
control assurance systems, but should at
least be knowledgeable regarding the various components of the process. By having this basic understanding of quality control assurance systems, CPAs can add value
K
to their services.
Jacqueline A. Burke, PhD, CPA, is an
associate professor of accounting and
Ralph S. Polimeni, PhD, CPA, is a professor of accounting and the Chaykin
Endowed Chair in Accounting, both at
the Frank G. Zarb School of Business,
Hofstra University, Hempstead, N.Y.
EXHIBIT 6
Greene Corporation
Division/Departments and Acceptable Defect Levels
Power Tool Division
Department
Hand Tool Division
Acceptable
Defects
Department
Acceptable
Defects
1 – Gas engines
0%
1 – Cutting & forming
2%
2 – Painting
2%
2 – Painting
3%
3 – Assembly
0%
3 – Assembly
2%
4 – Packaging
3%
4 – Packaging
3%
61
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