A step up in standards for peer reviewers

As part of its overall strategy to strengthen audit quality, in 2014 the AICPA issued the discussion paper Enhancing Audit Quality: Plans and Perspectives for the U.S. CPA Profession, which provides a path to affirm the profession’s commitment to audit quality. A key pillar of that plan is to modify and update the 35-year-old peer review process. An initial step in the strategy is an update to standards, which is intended to improve the competence and due care of individual CPAs serving as peer reviewers. The purpose of this article is to summarize the key provisions of the updated standards and the impact on CPAs who participate on both sides of the peer review process.

Peer review has a long history with CPAs, as firm-on-firm peer review has been a staple of quality assurance since the 1970s and continues as a mainstay in the profession’s continual efforts to improve performance on audits and maintain the profession’s reputation for rigor and trust. To maximize the ability of the program to fulfill its goal, the profession is recruiting and maintaining a roster of peer reviewers with the highest possible quality. Recent changes to standards represent one step toward enhancing the quality of peer reviewers.

The AICPA Peer Review Board approved changes to its Standards for Performing and Reporting on Peer Reviews (Standards) on Jan. 27, 2015, that will significantly affect the practice of CPAs who provide and receive peer reviews. Changes focusing on enhanced peer reviewer training requirements are effective for reviews commencing on or after May 1, 2016. Changes focusing on (1) resolving disagreements between CPA firms and their reviewers, (2) increasing the qualifications required to serve as a peer reviewer, and (3) strengthening the consistency of peer review performance criteria to facilitate prompt remediation or removal of deficient reviewers are effective for reviews commencing on or after Dec. 31, 2015. A comparison of the prior and new procedures is presented in the chart, “Comparison of Required Procedures.”

ENHANCED REVIEWER QUALIFICATIONS

The new qualification requirements apply to all CPAs conducting peer reviews. For any peer review engagement, the individual’s firm should have received a successful peer review (i.e., a rating of “pass”) within the last 3.5 years. For service as a peer reviewer of must-select engagements (see the sidebar “Types of Peer Review Engagements”), the individual must be currently involved in reviewing, supervising, or performing the same types of engagements in their own firms.

Most notably, the updated standards will significantly affect the requisite qualifications of peer reviewers of must-select engagements. The reviewer must undergo additional “high-quality” training in the must-select industry. The Peer Review Board has developed and issued training courses to meet the new requirements and may approve training courses that are essentially similar. In addition to the new training requirement, an individual conducting a system review must have spent the last five years in the practice of public accounting in the accounting or auditing function, be knowledgeable of the relevant industry area or economic sector, and be current with emerging standards. Also, where AICPA Audit Quality Centers (AQC) exist (e.g., the Employee Benefit Plan Audit Quality Center and the Governmental Audit Quality Center), reviewers of must-select engagements must be associated with firms that are members of the relevant AQC.

The peer reviewer should provide a list of all pertinent information to allow the administering entity (AE) to verify that the reviewer is qualified to perform peer reviews of the requested industry. The administrator may need to consult with a technical reviewer, report acceptance body (RAB) members, or committee members to determine whether the reviewer qualifies to add the industry code to his or her résumé. Once the AE determines that the reviewer is qualified to perform the review, the reviewer will be approved to perform the review. In cases when local resources are unable to determine whether a reviewer is qualified for a particular industry, the AE may also consult with AICPA staff.

The updated standards focus on resolving disputes between CPA firms and their peer reviewer more quickly. Under the prior process, AEs formed panels to consider disagreements. If those panels could not reach a conclusion, the disagreements were taken to the AE’s full Peer Review Committee, and if the committee could not make a decision, the matter was brought to the Peer Review Board. Under the new process, the panels formed by the AEs must make a decision, and any appeal goes directly to the Peer Review Board.

HANDLING REVIEWER PERFORMANCE ISSUES

If two significant reviewer performance deficiencies occur, the RAB should remediate or remove the reviewer within 30 days. The RAB or Peer Review Board may prescribe corrective actions for individuals with a “pattern of poor performance.” Reviewers can agree in writing with suggested corrective actions. Situations that require the Peer Review Board to form a hearing panel to review a complaint include reviewer disagreement with or failure to complete corrective actions. Sanctions may include a prohibition from practicing as a peer reviewer in the future.

To more consistently handle reviewer performance issues, the updated standards give reviewers a strict time frame to improve their performance or face disciplinary action. The updated standards clarify deficient performance with new terminology and criteria intended to improve consistent treatment of reviewer performance issues. Two new classifications of reviewer deficiencies now exist: (1) reviewer performance deficiencies and (2) significant reviewer performance deficiencies.

Reviewer feedback forms denote deficiencies in planning engagement selection, assessment and disposing matters, completing findings for further consideration forms, reporting, and completing and submitting workpapers. Per the updated rules, forms will classify performance issues using the new terminology. The standards streamline the quality-control process by enhancing competent peer reviewers. Peer reviewers with a “pattern of poor performance” who fail to correct their deficiencies may be sent to a hearing panel to determine future corrective actions, including a prohibition from serving as a peer reviewer. A finding of “significant reviewer performance deficiencies” is presumptively mandatory for removing peer reviewers if the deficiencies are not corrected (or if egregious acts occur). Reviewers can agree with suggested corrective actions or choose to file an appeal, which will require the Peer Review Board to form a hearing panel to review the complaint and decide what future actions to take. Further, the AE should notify the AICPA staff of such actions. (For changes beyond enhancing peer reviewer standards, see the sidebar “More Changes to Peer Review.”)

AN EYE ON QUALITY

The standards were updated to elevate reviewer qualifications and consequent performance, and enhance the reviewed firm and the public’s trust in the process. At a time when CPAs are devoting substantial efforts and resources to improving quality, the updated standards are designed to improve the value of the peer review process for both the reviewer and the reviewed firm, with the ultimate goal of protecting the public interest. In addition, the Peer Review Board has stepped up efforts to recruit new reviewers, particularly those who qualify to review “must-select” engagements, and the results have been encouraging. (See the sidebar “Why Become a Peer Reviewer?”)

Types of peer review engagements

Per the AICPA’s Peer Review Program, in general, firms that issue reports under Statements on Auditing Standards (SASs) or Government Auditing Standards (GAS), examinations under the Statements on Standards for Attestation Engagements (SSAEs), or engagements under PCAOB standards should receive “system reviews,” while those whose highest levels of services include issuing reports under Statements on Standards for Accounting and Review Services (SSARSs) and performing engagements under the SSAEs (other than examination engagements) should receive “engagement reviews.”

System reviews affect CPA firms that perform engagements in “must-select” engagement industry areas, while engagement reviews involve an evaluation of the technical work on a sample of engagements. Must-select engagements include industries with a significant public interest or benefit to the general public welfare, such as engagements performed under GAS—or audits of employee benefit plans or of broker-dealers, and audits performed under the Federal Deposit Insurance Corporation Improvement Act, P.L. 102-242.

A “system review” determines whether a CPA firm’s system of quality control for its accounting and auditing practice is designed to provide reasonable assurance that the reviewed firm (1) has designed its system of quality control for its accounting and auditing practice in accordance with AICPA quality-control standards; and (2) complies with quality-control policies and procedures in a way that will provide the firm with reasonable assurance of conforming with applicable professional standards. This review entails questioning CPA firm employees, evaluating documentation of processes, and reviewing a sample of engagements performed by the firm (emphasizing those of higher risk). The peer reviewer issues a report of “pass” (system provides reasonable assurance of complying with standards in all material respects), “pass with deficiencies,” or “fail” (system does not provide reasonable assurance of complying with standards in all material respects).

An engagement review ascertains whether specific engagements are performed in accordance with applicable professional standards without reviewing the firm’s quality-control system. The more focused engagement review is for CPA firms that do not meet the threshold for a system review. The peer review rating report offers negative assurance (i.e., nothing came to the reviewer’s attention) and will be pass, pass with deficiencies, or fail; it evaluates whether reviewed engagements are performed and reported on in conformity with applicable professional standards in all material respects.

More changes to peer review

Efforts to improve peer review extend beyond the new standards aimed at enhancing the quality of peer reviewers. Other near-term changes to peer review aimed at driving better audit performance include:

• Targeting firm quality and accountability. To improve detection of audit quality issues, the AICPA is introducing an enhanced practice monitoring approach that requires deep-dive reviews of certain specialized industries and areas of practice, including audits of employee benefit plans and single audits. The new approach also will include enhanced testing of firms’ controls to identify risks to quality, and increased accountability for firms that fail to comply with professional standards.

• Improving engagement and firm tracking. The AICPA is continuing its work to improve the completeness of the peer review population. Firms failing to report engagements subject to peer review jeopardize their enrollment in the program. Firms terminated from the peer review program may be subject to additional actions by their state boards of accountancy, including loss of their license to practice. The AICPA also plans to capture firms’ federal employer identification numbers and explore options to compare those data with other available databases (such as the U.S. Department of Labor’s EFAST2 and the Federal Audit Clearinghouse) to help ensure that all firms that should be enrolled in peer review are enrolled.

Why become a peer reviewer?

The AICPA is undergoing a concerted effort to recruit experts to help raise quality in its peer review program. The benefits of becoming a peer reviewer can include:

• Being seen as an expert and gaining increased respect from colleagues.

• Helping firms achieve their A&A practice goals and enhancing the quality of their A&A practices.

• Identifying best practices of other firms, which can be applied to other peer review clients and to your own firm.

• Gaining broader practice knowledge, which will sharpen skills and reinforce strengths.

• Developing an additional profit center for the firm.

• Receiving referrals for additional consulting services.

• Enhancing the efficacy of the profession’s self-regulatory efforts and contributing to the quality of the profession.

Here are some of the ways the AICPA is engaging firms to bring quality individuals into the peer review program:

• Expert oversight program. Firms are asked to encourage and allow experts in certain industry areas to participate in this new AICPA Peer Review Board initiative to evaluate peer review engagements before the peer review is considered by a peer review committee.

• Peer review team members. Firms are asked to provide experts to assist peer review team captains in reviewing engagements in certain high-risk industries.

For more information on becoming a peer reviewer, contact peerreviewer@aicpa.org.

About the authors

Alan Reinstein (a.reinstein@wayne.edu) is the George R. Husband Professor of Accounting at the School of Business Administration at Wayne State University in Detroit. Barbara Apostolou (barbara.apostolou@mail.wvu.edu) is a professor of accounting at the College of Business and Economics at West Virginia University in Morgantown, W.Va.

To comment on this article or to suggest an idea for another article, contact Ken Tysiac, editorial director, at ktysiac@aicpa.org or 919-402-2112.

AICPA RESOURCES

JofA articles

• “Evolving Practice Monitoring to Improve Quality in A&A Engagements,” Feb. 2015, page 18
• “A Holistic Approach to Audit Quality,” Sept. 2014, page 33
• “Learn From Data to Improve Audits,” Sept. 2014, page 34

Publications

• Audit Sampling—Audit Guide (#AAGSAM14P, paperback; #AAGSAM14E, ebook; #WAS-XX, one-year online access)
• Employee Benefit Plans—Audit and Accounting Guide (#AAGEBP15P, paperback; #AAGEBP15E, ebook; #WEB-XX, one-year online access)
• State and Local Governments—Audit and Accounting Guide (#AAGSLG15P, paperback; #AAGSLG15E, ebook; #WGG-XX, one-year online access)

CPE self-study

• Upcoming Peer Review: Is Your Firm Ready? (#731967, text; #163431, one-year online access)
• Professional Ethics: The AICPA’s Comprehensive Course (#732319, text; #155902, one-year online access)
• Audit Staff Essentials, Levels 1—3 (cpa2biz.com/ASE, one-year online access)

For more information or to make a purchase or register, go to cpa2biz.com or call the Institute at 888-777-7077.

Websites

• AICPA Peer Review page, aicpa.org/peerreview
• AICPA Enhancing Audit Quality page, aicpa.org/auditquality