Make sure you tell your peer reviewer about all the audits you do or things could get ugly – peer review update part 2

Previous post explained that hundreds of peer review reports are in the process of being withdrawn because the firms did not tell their reviewer that the firm performs pension audits. As a result, the review did not cover any of those engagements.

Make sure you tell your peer reviewer about all the audits you perform. Things can get real bad real fast if you don’t.

What are the next steps?

The administering entities will confirm information provided by the Department of Labor with the peer reviewer and the reviewed firm. Assuming information is verified, the administering entity will withdraw the acceptance letter. The reviewer may withdraw his or her report.

It is my understanding that some reports have already been withdrawn. Firms are now going through the process of getting the replacement reviews.

They may or may not be able to use their current reviewer.

Impact on the replacement review

This is where independence rules make things complicated. In order to be a reviewer, a CPA must not have been involved in the quality control system in the year of the review or the prior year. Depending on when the replacement review is performed, there’s a good chance the previous reviewer will not be independent and therefore cannot provide the new review.

In that in-between year, many reviewers will provide an inspection to the firm. That means the reviewer is not independent for that year and the following year. That means the replacement review can’t be performed by the same reviewer.

A reviewer must have experience that matches the audits in the review. If the current reviewer doesn’t do some pension audits, another firm will be needed or the reviewer will have to retain another reviewer to look at the pension audits.

Guidance of the AICPA Peer Review Board is that the issue of not including pension audits in the list of engagements provided to the reviewer is a Memorandum for Further Consideration  issue (abbreviated MFC – sorry, I can’t completely avoid the technical words). This is the basic building block of issues identified in a peer review. The reviewer will then need to consider the systemic cause.

The MFC could get elevated to one of three levels for disposition. Best case is an unintentional omission which is addressed in a Finding for Further Consideration (called an FFC), which would result in a written comment on the FFC to the firm to correct the action and a response on the FFC from the firm explaining what they are going to do. That would likely be the end of the issue.

The MFC could also be assessed is a deficiency or a significant deficiency by the reviewer. If a deficiency, the peer review report would be pass with deficiency. If a significant deficiency, the report would be fail.

In either case, the reviewed firm will be preparing a written letter of reply. There would be a corrective action coming down from the state Peer Review Committee.

Consider the impact on your insurance rate and client decisions from you disclosing a less-than-perfect report.

Next post: cascading consequences of your peer review report going away

10 thoughts on “Make sure you tell your peer reviewer about all the audits you do or things could get ugly – peer review update part 2”

  1. Let’s assume for a minute that the firms accidentally omitted EBP plans from the engagement list. If I am doing a peer review and I see “library” materials (such as PPC’s guide to EBP audits) and CPE relating to EBP plans, would I not ask the question? “If you don’t do these audits why do you have the practice aids and why are you getting CPE?”

    Something about this is not sitting right with me.

    1. Hi Kevin:

      If the reviewer is closing his or her eyes during the review, I’m guessing things will get real bad real fast for the reviewer. The hypothetical answers to your hypothetical situation will determine where things go.

      If the conversation proceeded with a wink-and-nod to skip the pension plan or the reviewer otherwise closed his eyes, trouble is ahead for everyone.

      If the firm omitted the pension plan because it wasn’t started yet thus wouldn’t be complete until after the review, then it could be excluded from the review. Still ought to be disclosed. A firm could incorrectly think they need not list it. My guess is that confusion wouldn’t be too bad.

      My fear is the possibility that some of our colleagues are gaming the system. If that is the case, again I said if, then there’s trouble ahead. If so then we, the profession, need to fix it. Part 5 in this series will make the point we better fix it ourselves before someone else fixes it for us.

      Thanks for commenting.


  2. Honestly the only POSSIBLE justification is that you have ONE EBP plan audit, it is the only one you do, it is the first time you did it, and you haven’t started/finished it before the peer review happens.

    Even in THAT situation, If I understand peer review standards, the actual peer review should not be commenced until that engagement is completed. You can’t go to a different EBP engagement OR the prior year specific EBP engagement because those don’t exist.

    Then, what are the odds that the DOL just happened to select a bunch of these situations for their desk/detailed inspections?

    If this were Denmark, I would suspect something is rotten.

    1. Hi Kevin:

      The situation you described is the best case for the firm. It would be easy to look at those circumstances and realize it was actually unintentional. I’m guessing that isn’t the only set of circumstances in play.

      Since we are talking hypothetical, consider a different scenario. Possibly the DOL pulled a report, found the firm did multiple other pension audits and has done so for a number of years, perhaps long enough to have otherwise gone through two or more peer reviews. Yet the peer reviews did not include any EBP in scope of engagements reviewed. That would be troublesome. As I wild guess, that is a likely scenario that DOL also encountered.

      I’m not aware of public discussion of the fact patterns found by DOL, let alone a frequency distribution. Perhaps there will be news shared at the peer review conference that is underway.


  3. In the spirit of not letting this go, I pressed the Missouri AE on this subject and apparently the DOL gave the AICPA a comprehensive/nationwide list of firms submitting audited financials in conjunction with 5500 filings. The AICPA cross checked this list to verify peer review program enrollment AND that these firms had an ERISA engagement selected in their most recent review. Obviously the answers in some cases were No/No and Yes/No.

    That makes more sense than the DOL just coincidentally finding 100% of a problem in their limited review/inspection efforts.

    1. Kevin:

      That makes sense. The intermediate steps haven’t been described, or else I missed the subtle comments. That approach fits – DOL sees a few that are a problem and asks the AICPA to cross-check the firms. Lost of exceptions surface. That then triggers the changes in peer review manual, representation letters, and pulling reports.

      The details are starting to fit.


    2. The No/No, meaning not enrolled in program and no EBP in the nonexistent review is a doubly serious problem. That hypothetical will create an extra long list of consequences for the firm. Not a good place to be.


  4. Having said that, I will assume that the AICPA requesting this list was prompted by a series of DOL audits of 5500 related EBP audits where the firm(s) did not have a peer review or adequate peer review coverage.

  5. My guess is that the next step in this process is the AICPA getting an EIN based dump from the Federal Audit Clearinghouse and going through the same matching process. Which MIGHT lead to additional peer reviews being recalled. Although, there are enough Yellow Book related requirements (CPE, peer review letter attached to engagement letter, etc) that one would think might prevent this situation.

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