The following article provides a superb update on recent developments in the peer review program. The article is graciously provided by the California Society of CPAs and the information described here applies in all jurisdictions across the U.S.
Because the entire article is quoted verbatim without any additional comments from me, none of the article will be placed in quotation marks.
Originally published by CalCPA (www.calcpa.org) in the October issue of California CPA magazine.
Used with written permission of the California Society of CPAs.
Be Prepared – A Comprehensive Peer Review Update
By Linda McCrone
Peer review is a successful program that helps firms improve their quality control systems and elevate the quality of accounting and auditing engagements. The AICPA contributed the software program that tracks peer reviews and the staff that manages the program. AICPA member volunteers contribute their time to oversee the program, keep the peer review program forms current and make certain that the peer review standards remain relevant. But like any successful program, peer review must continue to evolve to keep up with events.
Firms that perform audits under the Statements on Auditing Standards (SASs) or Government Auditing Standards (GAS), or examinations under the Statements on Standards for Attestation Engagements (SSAE), are required to have system peer reviews. The primary objective of this review is to evaluate the system of quality control that the firm has over its accounting and auditing practice. An integral part of that evaluation, especially for smaller firms, is the review of accounting and auditing engagements performed during the year under review.
Firms that only perform services under Statements on Standards for Accounting and Review Service (SSARs) or services under SSAEs not included in system reviews are required to have an engagement review. Engagement reviews focus on the review of selected engagements and limited documentation.
There are three types of peer review report: pass, pass with deficiency or fail. Generally, to receive a pass with deficiency or fail, a firm must have one or more matters that result in an engagement not performed, presented or reported in accordance with professional standards in all material respects (i.e. a nonconforming engagement).
Department of Labor
In May 2015, the Department of Labor released a report that found a greater percentage of nonconforming ERISA audits then were found by peer reviewers. The AICPA selected its own statistical sample of ERISA audits to review and agreed with the DOL assessment.
Peer review program administering entities – in other words, state CPA societies – are required to perform oversight on peer reviewers. In an oversight, a peer review committee member looks at some of the engagements, including work papers that the peer reviewer reviewed. Any additional matters noted by the oversighter are included in the peer review of the firm. A written report detailing the oversighter’s evaluation of the quality of the peer reviewer’s work is sent to the peer review committee. If the oversighter concludes that the peer reviewer has not complied with the peer review standards in all material respects, the Peer Review Committee generally require some corrective action.
The AICPA had an extensive due process were administering entities had to compile multiple instances of reviewer nonconformity over multiple years to be able to disqualify someone as a peer reviewer.
Starting in 2016 this process has been expedited, which should improve the quality of peer reviewers as a whole.
At least one of each of the following types of engagements is required to be selected during a system review:
- Engagements performed under GAS;
- Audits of employee benefit plans;
- Audits performed under FDICIA;
- Audits of carrying broker-dealers; and
- Examinations of service organizations (SOC engagements).
There is a paragraph in the peer review report that identifies which of these must-selects that the firm performs.
A few years ago the AICPA matched the audit reports filed with the DOL to firm peer review reports. If a client has a pension plan with more than 100 participants, the client is required to file an audit of that plan with its annual report on Form 5500.
The AICPA found that a significant number of firms did not inform their peer reviewers that they perform pension plan audits. These firms had their peer review recalled, the state Board of Accountancy was notified and the firm had to have another peer review done that included a pension plan audit.
The AICPA is now matching audits filed with the Federal Clearing House to the peer review report of the firm. Nonprofit and governmental entities that are required to have an audit performed under OMB Circular A-133 or Uniform Guidance are required to file the audit with the Federal Clearing House. There may be additional peer review recalls as a result of this matching process.
The AICPA requires firms to supply their employer identification numbers on the peer review scheduling form to make the matching process easier. The AICPA will appoint a hearing panel for firms that have incorrectly reported engagements to their peer reviewers to determine if the firm’s peer review program enrollment should be terminated.
All firms need to have a system in place to identify the types of engagements each owner is performing. Engagements to be included in the peer review engagement list are based upon the financial statement dates of the client, not the date of the auditor’s or accountant’s report. If a firm accepts an engagement in a new must-select category after the peer reviewer has completed fieldwork, but before the review is accepted, the peer reviewer and administering entities must be notified.
Termination of Enrollment in Peer Review
Upon receiving a pass with deficiency or fail report, most firms work to improve their accounting and auditing practice or decide not to perform certain types of engagements in the future. A few firms take no action and accept repeated pass with deficiency or fail reports.
Effective last year, a firm that receives a pass with deficiency or fail report will receive a letter informing it that if its next peer review is a pass with deficiency or fail, then the peer review committee and the AICPA will consider whether its enrollment in the program will be terminated.
A firm will not be terminated for one mistake. However, if its auditing documentation has many material matters resulting in nonconforming engagements and there is no improvement from the prior peer review, termination is a possible outcome. There would be a hearing panel before this occurs.
Management use-only financial statements are no longer allowed. Instead, firms may perform preparation engagements. The AICPA and the California Board of Accountancy do not require peer review of a firm that only performs preparation engagements under SSARS. However, if a firm has other engagements that require a peer review, preparation engagements may be reviewed.
Unlike management use-only statements, preparation engagements must be presented in accordance with our professional standards.
Things to remember for a preparation statement:
- There is no report.
- Financial statements can be prepared in accordance with GAAP or a special-purpose reporting framework, such as the tax or cash basis. If a special purpose framework is used, it must be identified on the financial statements.
- Each page of the financial statements must state that “no assurance is provided” or that information must be provided in a disclaimer letter.
- All departures from the accounting framework used must be identified and disclosed on the face of the financial statements or in a note. These departures might include the omission of disclosures, the decision not to present a statement of cash flows in a GAAP presentation or decision not to allocate debt between current and long-term portions.
- There must be an engagement letter signed by the client and the firm, which is also not required for compilation and review engagements.
Changes in 2017
Major changes to the AICPA Standards for Performing and Reporting on Peer Reviews will become effective for peer review starting on or after Jan. 1, 2017. The changes that will have the biggest impact on firms include:
- Peer reviewer and firm responsibilities when nonconforming engagements are identified have been clarified. Under current standards, the firm’s decision is most often to fix the problems noted prospectively. The new standards require the firm to analyze the situation and explain why a decision to fix prospectively is appropriate. In other words, the expectation is that additional work will be done to support the report for a nonconforming engagement. Further, if the peer reviewer or report acceptance body do not agree with the firm’s decision, a deficiency may be added to the report concerning a weakness in the firm’s “tone at the top.”
- The new standards make it clear that deficiencies may be present in the firm’s system of quality control even though no nonconforming engagements were identified.
- Peer review risk assessment procedures to be performed, especially in the areas of testing each element of quality control, have been increased.
- Information to include in a firm’s response to a Finding for Further Consideration Form or in a letter of response has been clarified.
Best practice for avoiding a non-conforming engagement: use purchased, current third-party practice aids appropriate for the industry being audited and understand the interrelation of the various programs and checklist. These products have been peer-reviewed and following the guidance ensures compliance with the audit standards.
If a firm creates its own practice aids, or uses third-party practice aids selectively, firm personnel need to understand audit standards sufficiently to ensure compliance with them. The AICPA has inexpensive accounting and auditing guides for specific industries that provide additional valuable information.
Be Prepared for Your Next Review
There is a scarcity of peer reviewers, so firms need to be on top of the peer review process.
Peer review occurs every three years. The California administering entity sends the scheduling form in the month after a firm’s peer review year-end. Complete the form and engage a peer reviewer immediately. Peer reviewers review engagements with periods ending within the peer review year, so firms have six months to finish most of their engagements and get the peer review completed. Please do not wait until the sixth month to start the peer review process.
A directory of reviewers is available at www.calcpa.org/peer-review. In addition, for firms with audits in unusual or complex industry, there’s a “find a reviewer” tool on the AICPA peer review website at www.aicpa.org/INTERESTAREAS/PEERREVIEW/Pages/PeerReviewHome.aspx . Also, due to the change in peer review standards and the continued emphasis on audit quality, expect future peer reviews to take longer and cost more.
Linda McCrone is CalCPA’s director of technical services.
Originally published by CalCPA (www.calcpa.org) in the October issue of California CPA magazine. Used with written permission of the California Society of CPAs.