Previous posts in this five-part series mentioned that there are a few hundred peer review reports that are in the process of being withdrawn by various state administering entities. The reason is the review did not look at a pension plan audit when the firm performed one or more of them.
As I mentioned before, I’m writing these posts without explaining a lot of the technicalities that exist in the peer review program. I’m leaving out some of the terminology, skipping some details, and simplifying things. I’m doing this to help CPAs who don’t live in the peer review world.
Before jumping in to the consequences, a bit more background:
Charles Hall has an overview of the recall issue at CPA-Scribo: Peer Review Reports Being Recalled.
Scuttlebutt he has heard suggests 1,100 reports are in process of being recalled. I heard it may be in the range of a couple hundred. If that makes you think this is a developing story, you are correct.
Here are a couple of things you can look at:
Peer Review Board Open Session Materials – May 28, 2014 – News flash from that document is that DOL sent the AICPA a list of about 5,000 firms who reported on an ERISA audit for year ending December 31, 2011. AICPA staff researched those firm names with the publicly available peer review report. They found exceptions, with amount not mentioned in the materials. Resolution of the exceptions by state administering entities and the involved peer reviewer wasn’t what the PRB wanted to see. Thus, in April 2014, the PRB voted to require automatic recall of acceptance letters and require peer reviewers (shall) to withdraw their reports.
That describes how this started and why there seems to be a lot of activity now.
June 2014 Peer Review Update – Contains guidance for the replacement review.
I plan some more updates beyond the 5 already drafted. Now we ponder the consequences.
Consider the cascading consequences from your peer review report being withdrawn. That means the report on your firm doesn’t exist. You didn’t have a peer review when required.
Consider the following –
Cost – think of the dollar cost and the amount of time it takes to go through a peer review. Depending on the timing, the replacement review may happen in the same year as the review would have otherwise happened anyway. Less lucky firms will have the review a year or two early. Unlucky firms will get to have a replacement review covering the same time as the previous review – this means the cost will be doubled.
Actually the cost will be higher than the previous review for multiple reasons. First, a must-select engagement will be included which will increase the time on the review. Second, you may have to find a new firm and likely won’t be getting as good a deal as you have now. Third, my impression is that reviewers charge more for must-selects. Fourth, there is an increased chance of the review workpapers getting called in for oversight, which increases the reviewer’s time, which will likely increase the fee.
Disruption – The replacement peer review report is due 90 days after the previous report is withdrawn. You don’t get to pick the timing. Imagine going through a peer review in the midst of your busy season. Just as a wild guess, if letters are going out in June, July, and August, the 90 day deadline for a replacement review will be in the range of September through November. As I understand that is the busy time to get pension audits wrapped up. That will also be the busy time for reviewers who are able to provide a review of pension engagements.
State board of accountancy – The meeting materials I mentioned above indicate the administering entities need to notify the state board of accountancy when an acceptance letter is withdrawn. That means your state board will find out shortly after you do.
If your state has a requirement to have a peer review as a condition of licensing, you are not in compliance when the report is withdrawn. If you’re lucky, you’ll only get nasty, mean letters from your state board.
I have no idea what any of the state boards will do, but will guess that some of them will start assessing fines for failure to have a peer review when required. Some of them might start disciplinary actions which could result in some sort of sanction on the individual CPA or firm. Things get real ugly real fast if you go down that path.
Insurance rates – I have no idea what the insurance carriers will do, but they will likely increase your rates if you wind up with a pass with deficiency or fail report. They may reassess your risk if you weren’t getting proper reviews. They may even retroactively change your prices based on what they now considered to be a misrepresentation for not having a peer review when you said you did (insurance companies can be funny-weird about things like that). Like I said, I don’t know how that will shake out, but can’t imagine it will be pretty.
Representations to clients – If you also perform single audits under government auditing standards, you’re obligated to provide a copy of your peer review report to your client. If your latest peer review report is withdrawn and you had previously given that report to clients, there’s the awkward situation that you incorrectly told them your status.
That could have affected a client’s decision on what firm to hire, in which case they will be unhappy. That could affect a client’s decision on whether to retain you again. At a minimum it affects your credibility.
What do you think? All comments welcome if they are professional.
Next post: continuing list of cascading consequences.