|Anita Dennis is a Journal contributing editor.|
A firm is responsible for its quality control system and the peer review that monitors compliance with that system. In order for each activity to work effectively, practitioners must understand the quality control and peer review standards that are required for a firms accounting and auditing practice. Although the prospect of peer review can seem daunting, it only becomes harder if firms are unaware of the options and flexibility available to them. This article discusses some of the points CPAs should remember about peer review and clarifies some common misunderstandings.
WHAT CPAs SHOULD KNOW
Peer reviews are undertaken to ensure that a firm is complying with professional standards and its own quality control system. Heres a rundown of a few important requirements for CPAs engaged in public practice:
- Fact. The peer review process involves CPAs in public practice. According to the American Institute of CPAs bylaws, the practice of public accounting consists of the performance for a client, by a member or members firm, while holding out as CPAs, the professional services of accounting, tax, personal financial planning, litigation services and those professional services for which standards are promulgated by bodies designated by the AICPA governing council. Members of the AICPA engaged in public practice must be associated with a firm that is enrolled in an approved practice-monitoring program. A firm enrolled in the AICPA peer review program or a member firm of the AICPA division for CPA firms is considered to be enrolled in an approved program. The remainder of this article addresses only the standards that are applicable to the AICPA peer review program.
- Fact. A firm must have a system of quality control for its accounting and auditing practice that meets the requirements of Statement on Quality Control Standards no. 2, System of Quality Control for a CPA Firms Accounting and Auditing Practice. A peer review monitors a firms compliance with its quality control system.
- Fact. A firm must enroll in an AICPA practice-monitoring program even if it performs no audits, reviews or compilations, but it need not undergo a review. Each year, the firm must confirm to its peer review program administrator (usually the state CPA society) that it has performed no audits, reviews or compilations. If it is engaged to perform one of these services, it must have a peer review within 18 months of the fiscal yearend of the first audit or accounting clients accepted.
- Fact. Firms that perform only compilation or review engagements may have offsite reviews. Firms that perform one or more audits must have onsite reviews to ensure the audits were in accordance with generally accepted auditing standards. Audits receive special attention because third parties rely on the financial information.
- Fact. Sole practitioners often find it difficult to accommodate onsite reviews in tight office space. A firm whose prior review is unqualified and that has four or fewer professionals can bring all of the normally required material to the reviewers office or another mutually acceptable location. The sole practitioner and the reviewer can discuss the responses to the quality control policies or procedures questionnaire, the engagement findings and the reviewers conclusions in person or over the phone.
- Fact. Firms that no longer perform audits should notify in writing the state CPA societies that administer their reviews of this change and would not ordinarily be required to have an onsite peer review.
- Fact. Members of firms receiving unqualified opinions on their peer reviews may become peer reviewers themselves provided they have undergone a reviewer training course and meet other requirements. The fees for performing this service can offset the costs of peer review and the experience and knowledge gained can enhance the reviewers practices.
Contact your state CPA society to learn more about this opportunity.
GETTING IT STRAIGHT
Here are some of the myths about peer review—and the realities.
Myth. Theres only one way to run a quality control system. Firms have many mistaken beliefs about the internal processes that must be in place if they are to receive an unqualified peer review report. For example, it is not necessary to use checklists, "but thats probably the most common misunderstanding I see," says Bea Nahon, who has an eight-person Bellevue, Washington, firm and who conducts about six peer reviews a year, both off- and onsite. "A checklist is one possible means of ensuring quality control—and it may be very helpful to a firm—but its not a requisite for passing a review."
In other instances, firms mistakenly believe a quality control document is mandated. "Some firms come up with very stringent quality control documents based on examples they have seen—and then they arent able to follow them," says Mary Ellen Johnson a partner of Trosch & Co., a 15-person Pittsburgh firm. "You dont really have to do that. There are other ways to document your procedures and policies in smaller firms. In our firm, we fill in the peer reviewers questionnaire on how we do things. I also send memos to staff, in order to document policies and procedures."
The AICPA has published guidance materials that illustrate quality control systems for national, regional and local firms as well as for firms with one CPA. The Guide for Establishing and Maintaining a System of Quality Control for a CPA Firms Accounting and Auditing Practice can be obtained by calling the AICPA order department at 800-862-4272 (product no. 067020JA).
Myth. The state CPA society picks the reviewer. State CPA societies can appoint reviewers for firms that want them; the firm receives whats called a committee-appointed review team. But firms can also find their own reviewers. The state CPA society can assist you by providing lists of reviewers within a state or a group of states. Once the reviewer has been selected, notify the state CPA society. Reviewers should be approved as long as the reviewers meet the qualifications stipulated in peer review standards. "More and more firms are realizing they can pick their own reviewers for a firm-on-firm review, but many still think you have to go through the state society," says Nahon.
"If you select someone who is knowledgeable about firms of your firms size, someone youve talked to or interviewed who has similar clients, you not only get the peer review but you also can get a lot of other advice," says Johnson.
Key attributes to look for are firms that are roughly the same size and that serve the same types of clients or industries, so that the reviewer can better understand the practice. In addition, there should be mutual respect between firm and reviewer. Firms should evaluate the reviewers qualifications and experience just as they would consider the qualities of any other professional retained by the firm.
Myth. Its just one more compliance nightmare. Nahon concedes that many firms are unenthusiastic about peer review. "But if the peer review is done correctly and you select the right reviewer, it can be a great planning and management tool," she insists. "Its a natural opportunity to ask another practitioner about staffing issues, hiring, salaries, office procedures, documentation—even tax matters."
WHERE TO TURN FOR HELP
An article of this size can only provide a brief review of some of the issues associated with peer review. Firms that have questions about peer review should call the state CPA society administering the review or the AICPA peer review program staff at 201-938-3030. A little information can go a long way in making the process less daunting and more productive for the firms involved.