Review: An Emerging Niche Market
By James Schmutte and John R. Thieling
JULY 2008 - The AICPA’s Peer Review Program began more than
30 years ago as a voluntary program. It has since been incorporated
as an AICPA membership requirement for individuals in public practice.
Several of the AICPA’s audit quality centers (such as the
Governmental Audit Quality Center and Employee Benefit Plan Audit
Quality Center) either require peer review for membership or require
that member firms make their peer review reports readily available
to the public. Peer review is now a licensing requirement for accounting
firms in more than 40 states. Additional jurisdictions are either
implementing enacted legislation or working toward mandatory peer
State peer review licensing requirements
are structured around, and incorporate, the AICPA’s Peer
Review Program. The movement of peer review from a voluntary aspect
of practice to a licensing requirement has created a demand for
CPAs to participate as reviewers in the profession’s self-regulatory
efforts. This has created an opportunity for public accounting
firms to expand their line of services.
The decision to become a peer reviewer should be approached in
the same manner as expanding into any new line of service. The
following factors should be evaluated: the market demand for the
service, the competition from other service providers, the cost
and investment required to support the service, the pricing of
the service, the institutional support, and the potential additional
benefits (e.g., firm reputation, networking opportunities) that
might accrue from providing the service.
The Market for Peer Review Services
When deciding whether to offer peer review services, an obvious
starting point is the extent of the market for peer review services.
In 2006, the AICPA reported that more than 37,000 firms enrolled
in the AICPA Peer Review Program (“Questions and Answers
About the AICPA Peer Review Program, Update No. 7,” January
Approximately 30,000 of these firms are required to have a peer
review at least once every three years. As illustrated in Exhibit
1, firms with five or fewer professionals dominate the AICPA’s
program (see Susan Coffey, “Professional Developments Impacting
the Peer Review Program,” 2007 AICPA Peer Review Conference).
Accordingly, no CPAs should think that their firm is too small
to provide peer review services.
Just as practitioners should not rule out providing peer review
services because of the size of their firm, they should not think
that the nature of their accounting practice precludes them from
becoming a peer reviewer. As illustrated in Exhibit
2, the majority of peer reviews are not systems reviews. In
other words, CPAs in firms that do not perform audits are eligible
to perform peer reviews on other firms that do not perform audits.
Accounting firms without an accounting or audit practice are
exempt from peer review requirements; nonetheless, several factors
will continue to feed the demand for peer reviews. The National
Association of State Boards of Accountancy (NASBA) continues to
push for peer review as a requirement for firm licensing. With
the addition of peer review as a licensing requirement in states
where it is not currently required, the number of firms seeking
peer reviews is likely to increase significantly. For example,
the implementation of the peer review licensing requirement in
Indiana brought nearly 300 new firms into the peer review process.
This represented a 33% increase in the number of reviews being
In addition to its growing importance as a licensing requirement,
peer review continues to be a requirement for performing audit
engagements subject to GAO Yellow Book standards. Along with the
regulatory requirements that mandate peer review, organizations
are encouraged to request peer review reports as part of the CPA
firm selection criteria when contracting accounting or auditing
services (see the AICPA’s toolkits for audit committees).
These forces can be expected to provide a stable and growing demand
for peer review services.
Competition in the Market for Peer Review Services
All reviewers are listed in the AICPA’s reviewer database,
but only those approved by the state society administering the
review are authorized to perform peer reviews within that jurisdiction.
There is currently a critical shortage of qualified peer reviewers.
An AICPA study, “Board of Directors Peer Review Task Force
Report: Recommendations for Enhancing the AICPA Peer Review Programs
in a Transparent Environment” (February 9, 2006), reported
that in 2004 there were 1,793 practitioners qualified as peer
reviewers, and only 1,444 met the requirements to serve as team
captain on a system review (the equivalent of the engagement partner
in an audit situation). The significance of these numbers is that
each is the product of a steady decline in both reviewers and
team captains since 2001. During the period 2001– 04, the
number of reviewers decreased 15%, with a corresponding decrease
in the number of team captains.
With a growing demand for peer review services and a simultaneous
decline in the size of the reviewer pool, the number of peer review
engagements performed annually by reviewers has increased significantly.
During the period 2001– 04, the proportion of reviewers
who performed six or more peer reviews each year increased 24%.
Team captains experienced an even greater increase in the number
of engagements performed annually. In 2001, team captains who
performed six or more peer reviews annually represented 34% of
the reviewer pool. By 2004, more than 40% of team captains led
six or more reviews each year.
To compound the problem, the pool of reviewers and team captains
is not only shrinking in size, but also aging (Exhibit
3). Absent an influx of new reviewers and team captains, the
pool of qualified reviewers and team captains will continue to
shrink, creating an even greater demand for qualified peer reviewers.
Firms with a significant accounting or auditing practice will
require little, if any, additional investment of firm resources
to add peer review as a service line. Existing resources may,
however, require some redirection. The resource most directly
affected by the decision to provide peer review services is firm
personnel. Due to the nature of the peer review process and the
AICPA’s reviewer requirements, only firm personnel at the
partner and supervisory levels are eligible to be a peer reviewer.
The AICPA requires that a peer reviewer meet the following requirements:
- Be a member of the AICPA in good standing, licensed to practice
as a CPA in a firm that has received an unmodified report for
its most recent system or engagement peer review that was accepted
within the last three years and six months;
- Possess current knowledge of applicable professional standards,
including quality control and peer review;
- Have at least five years of recent accounting or auditing
experience in public accounting;
- Be currently active in public accounting as a partner or
manager (or with equivalent supervisory responsibilities) in
the accounting or audit function in a firm enrolled in an approved
practice monitoring program; and
- Complete a peer review training course that meets the requirements
established by the AICPA Peer Review Board (PRB), when the function
of the reviewer goes beyond reviewing engagements.
In addition to the above requirements, to qualify as a team captain
on a system peer review, one must be a partner in an enrolled
firm that has received an unmodified report on a review on its
system of quality control for its accounting and auditing practice
for its most recent peer review that was accepted within the last
three years and six months. CPAs in firms that do not perform
audit engagements but received an unmodified engagement peer review
report are qualified to perform engagement and report reviews
which, as illustrated in Exhibit 2, represent half of the market
for peer review services.
While the out-of-pocket costs to qualify as a peer reviewer or
team captain may be minimal, there are some questions regarding
the revenue stream generated by peer reviews. Will the new service
provide adequate revenue growth? Will billable time be diverted
from traditional client services? The answer to these two questions
is a function of the number of traditional billing hours affected
by the peer review engagements, the number of peer reviews performed,
and the billing rate for the peer review service.
The decision to add peer review services does not necessarily
mean a reduction of services to existing clients; it is more a
matter of determining how to market the firm’s services.
The development of a peer review practice will most likely be
a gradual process, as the reviewer’s experience and reputation
grow. While some traditional accounting and auditing clients may
be culled out to free up time for the new peer review service,
these decisions should be based on standard criteria for evaluating
Other considerations related to peer review engagements are the
timing of the workload and the types of peer reviews. Peer review
engagements are primarily performed during the summer and fall,
when firms traditionally have a greater capacity to absorb new
engagements. In addition, engagement and report peer reviews,
which represent more than half of peer reviews, are performed
in the reviewer’s office and do not require travel or on-site
time. The peer review practice could be limited to report and
engagement reviews. This would allow the peer review engagements
to be worked into the reviewer’s schedule without necessarily
disrupting service to existing clients.
In the past, peer review pricing was unduly influenced by the
fee structure prescribed by the Committee Appointed Review Team
(CART) service sponsored by the AICPA and its administering entities.
Under the CART program, firms seeking a peer review were matched
with a reviewer by the program’s administrators, and the
corresponding fees were based on the AICPA’s established
rate structure. Many state administering entities have eliminated
their CART program, and the CART fees are no longer applicable
or published. Unfortunately, these discounted billing rates carried
over into the firm-on-firm market.
The resulting fees were not “market driven” but were
artificially established, and on the low end. In fact, the AICPA’s
recent study on the peer review program acknowledged that low
fees were a contributing factor in the decline in the number of
reviewers noted above. Currently, market forces are pushing peer
review billing rates to levels more comparable to those for other
professional services. Both hourly and fixed fees have been adjusted
upward to reflect full realization rates.
If a reviewer has experience in certain industries or audits
such as Yellow Book, A-133, or ERISA, there is an even greater
demand for these specialized peer review services. Reviewers with
such experience will find demand not only from firms seeking peer
review, but also from other peer review teams that need a member
with that expertise for reviewing engagements. In other words,
the reviewer can either undertake full responsibility for a peer
review (team captain) or function as an outside expert (team member).
Being a reviewer can lead to other CPA-to-CPA services. With
mandatory peer review as part of firm licensing, many firms will
have to address quality-control issues such as monitoring and
inspections, which can be difficult to implement internally. Purchasing
these services from a peer reviewer may be an optimal solution.
Limiting the services to non–peer review clients would avoid
any independence issues for peer reviewers. In a similar vein,
a peer reviewer could provide ongoing consultation or engagement
pre-issuance review services to non–peer review clients.
Because peer review is a licensing requirement, accounting firms
are increasingly looking for cost-effective ways to address quality-control
Unlike audit engagements, peer reviews and related services must
be performed exclusively by firm personnel with extensive experience
and expertise; leveraging lower-level staff is not possible. Accordingly,
the fee structures for peer review services should reflect the
experience and expertise of the managers and partners performing
The AICPA’s Peer Review Program is a national program in
terms of review standards, performance requirements, and general
administration, yet the program is implemented and administered
at the state level by the state CPA societies. The AICPA’s
PRB is responsible for issuing peer review standards and guidance,
as well as overseeing the activities of the state CPA societies
administering the program. The state administrating bodies are
responsible for scheduling reviews, accepting reports, and overseeing
their own activities.
Once one meets the reviewer qualifications, the initial step
is to register as a reviewer by entering a resume into the AICPA’s
reviewer database via the AICPA’s website. Once registered,
a reviewer can be approved to perform specific reviews. The AICPA
does not pair reviewers with firms seeking reviews. Reviewers
are approved by the states’ administering entities, based
on a matching of the reviewer’s experience and the industry
specialization within the reviewed firm’s practice, as entered
into the AICPA’s database.
In an effort to ensure consistency in the performance and administration
of peer reviews, the PRB provides a wealth of free resources to
assist and guide reviewers and team captains. These aids, available
on the AICPA’s website, include checklists, practice aids,
and authoritative guidance materials from the PRB. The required
forms and checklists associated with performing the various types
of peer review engagements are available for download. To further
assist the peer reviewer, the AICPA has added an additional “practice
management tool kit” to facilitate and enhance communication
between the peer reviewer and the firm under review.
Peer review standards do not change often—a recently announced
revision in the standards is scheduled to go into effect January
1, 2009—but addressing their interpretation and implementation
is often necessary as practice issues arise. The PRB periodically
issues the Reviewer’s Alert to address such issues.
The publication, which is available on the AICPA’s website,
provides the reviewer with the position taken by the PRB in terms
of the peer review implications of matters such as the impact
of a firm’s failure to comply with Rule 101-3 on independence.
While the purpose of the guidance is not to remove the reviewer’s
professional judgment in resolving a matter, the intent is to
inform reviewers of the PRB’s position and what might be
considered appropriate in certain peer review situations.
A further resource available to reviewers is direct access to
the AICPA’s Peer Review Program’s technical managers.
Reviewers are free to call for technical guidance when addressing
any unusual or unique performance or reporting situation that
may arise. The technical managers can either direct the reviewer
to the guidance within the literature or provide their interpretation
of the situation based on their experiences in working with the
PRB and assisting other reviewers.
The reviewer also has free access to the resources available
through the state society. Each administering entity has a peer
review program administrator who can assist the reviewer in resolving
matters associated with scheduling reviews and dealing with the
AICPA and the particular state’s peer review committee.
For technical matters, the administrator may refer the reviewer
to the state’s technical reviewer.
Technical reviewers function as the link between the state’s
peer review committee and the team captain or reviewer. Prior
to a review being presented to the state’s peer review committee
for final acceptance, a technical reviewer reads the peer review
report, letter of comments (if issued), letter of response (if
issued), and the review’s associated documentation. The
technical reviewer is responsible for verifying that the review
was performed in accordance with peer review standards, that the
findings were handled consistent with PRB guidance, and that the
peer review engagement’s documentation is complete and internally
consistent. If there are any questions regarding the review, the
technical reviewer works directly with the reviewer or team captain
to resolve the issues before it is presented to the committee.
The technical reviewer has extensive experience in dealing with
all aspects of the peer review process. The reviewer has the opportunity
to present and discuss any situation with the technical reviewer
before the peer review is submitted to the state society. By taking
advantage of the technical reviewer’s services while the
review is still in process, a reviewer can address the issue,
speeding up the completion and acceptance of the review and yielding
a higher realization.
Being a peer reviewer can yield a number of nonmonetary benefits
to the individual reviewer and to the firm. When experienced reviewers
are asked what they get out of being a peer reviewer, a common
response is that it keeps them “on top of their game.”
Being a peer reviewer enhances their knowledge and skill. Reviewers
benefit from the opportunity to observe other firms’ quality-control
systems in action. The reviewers also see how firms implement
new professional standards and address unique accounting or auditing
situations. This allows reviewers to not only share their experiences
but also benefit from those of others.
Peer review also creates a forum in which the reviewer and the
firm’s personnel often discuss nontechnical matters beyond
the scope of peer review. Shared concerns related to practice
management, technology, purchased services, recruiting, and staffing
are often discussed during a peer review.
Peer review originated as an educational program to provide an
opportunity for practitioners to share the experiences of their
peers. While peer review has evolved into an element of the regulatory
environment, the original intent and spirit of the program continue.
In most peer review engagements, both the reviewer and the firm
come away better for the experience.
Marketing Peer Review Services
With the decision to add peer review to the firm’s portfolio
of services comes the question of how to market the new service.
Most engagements will come from firms seeking the reviewer’s
services, rather than traditional marketing efforts where the
reviewer is “selling” the service. As with other professional
services, once the peer review practice is established, new business
will come by way of referrals from existing clients.
The AICPA’s toolkit includes marketing and sales ideas,
sample letters to prospective firms, management tools to track
and monitor prospects, as well as questions and answers to develop
a commitment within the firm to support the peer review practice.
New reviewers must accept the reality that a peer review practice
will start with only a few engagements. Over time, however, the
practice will expand as existing clients spread the word. On the
plus side, gradual growth allows a firm to absorb the new engagements
without disrupting service to the firm’s other traditional
A firm’s initial source of peer review engagements will
most likely be through the AICPA’s reviewer database. Firms
preparing for their first peer review and those looking to change
reviewers utilize the database to identify potential reviewers.
The database allows searches for reviewers based on state, industry
experience, and practice areas. From the results of the initial
search, secondary descriptive information about each reviewer
and his firm is available. By using the database, a firm seeking
a peer reviewer can find one who meets the stipulated criteria.
As a firm’s peer review client base develops, it should
expect additional referral engagements.
Myths and Misconceptions
Some CPAs may be hesitant to enter the peer review market due
to a perception that many engagements present peer review problems
that lead to lower realization rates. In fact, the vast majority
of firms do not have significant reporting issues. More than 90%
of systems and engagement reviews result in unmodified reports
4). Likewise, only a small minority of report reviews result
in significant comments (Exhibit
In addition, the AICPA’s proposed changes in the peer review
standards will roll report reviews into the engagement review
model and eliminate the letter of comments (LOC) from the reporting
model for both systems and engagement reviews. This change is
anticipated to reduce the level of contention between the reviewer
and the firm for the vast majority of peer review findings.
Realization rates on peer review engagements can be enhanced
in a number of ways. As with any professional service, the starting
point is the decision to accept the client. Initial inquiries
into the nature of the firm’s practice and its quality-control
policies and procedures can help identify and avoid firms that
may present peer review problems. Second, peer review services
should be billed in line with other professional services. Third,
peer review is similar to other professional service engagements
in that efficiencies can be gained by incorporating templates,
tools, practice aids, and technology wherever possible. While
each peer review is unique, they all share documentation and paperwork
that can be easily adapted to each engagement. Last, peer reviewers
can head off engagement delays by consulting with the state administering
entity and its technical reviewer as soon as problems appear.
Another common misperception is that the AICPA’s and the
state societies’ oversight activities of the peer review
program place an added burden on peer reviewers, subjecting their
work to another round of scrutiny. Most of the oversight is performed
behind the scenes and does not impact the peer reviewer. The state
administering entity does, however, have a responsibility to examine
a sample of the peer reviews performed each year. In the case
of engagement and report reviews, the oversight is performed as
an after-the-fact “desk review,” which normally does
not affect the reviewer. System review oversights are typically
performed during the actual peer review and include a visit by
a representative of the peer review committee who reviews work
papers and sits in on the closing meeting between the team captain
and the representatives of the reviewed firm. The cost of the
oversight is absorbed by the administering entity and does not
significantly add to the time or cost of the peer review to either
the reviewer or the reviewed firm.
Some CPAs may be reluctant to invest their energy in developing
a peer review practice under the belief that the future of the
AICPA’s program is uncertain in light of recent criticism
of the quality of audit reports from the Department of Labor (DOL)
and the Office of Management and Budget (OMB). In other words,
will a federal program similar to the PCAOB’s inspection
program for auditors of public companies replace the AICPA’s
peer review program? Actions to date suggest that the DOL and
Government Accountability Office (GAO) are taking actions that
will not challenge the AICPA’s program.
In 2005, the DOL began a new audit quality enforcement initiative
aimed at improving the quality of ERISA audits. The new initiative
uses a two-prong approach. Firms that perform a significant number
of audits will be reviewed in a top-down manner similar to a PCAOB
on-site inspection. Firms that perform only a limited number of
employee benefit plan audits may have an engagement selected for
a detailed in-house review that covers the report and selected
Responding to the OMB’s concerns over audit quality, the
Audit Committee of the President’s Council on Integrity
and Efficiency (PCIE) undertook an in-depth study to statistically
measure the extent to which single audits conform to applicable
requirements and address audit quality issues. The report included
three recommendations: revise OMB A-133 and related standards,
establish minimum training and CPE requirements (similar to Yellow
Book requirements), and enhance processes to address unacceptable
audits and reviewers that do not meet training and CPE requirements.
One final concern that some CPAs have is that performing peer
review services might expose them to an additional business risk
by being associated with firms of questionable quality. With peer
review increasingly a requirement for licensure, some fear that
they may be pulled into an investigation or litigation related
to a former peer review client. The information acquired in the
performance of a peer review is subject to the same privilege
by statute as is any other professional service. To date, there
has been no reported instance of the work of a peer reviewer being
used in conjunction with any investigation or litigation directed
at a former review client.
Most Likely to Succeed
Admittedly, becoming a peer reviewer is not for everyone. CPAs
active in the accounting or audit function will find the technical
aspects of peer review a natural extension of their experiences.
Likewise, CPAs who have assumed significant roles in the quality-control
structure of their own firms will find an easy transition into
the peer review function.
Individuals with strong people skills who are comfortable in
the role of teacher or mentor will find being a peer reviewer
Accounting practices have traditionally been structured around
providing accounting and auditing, tax, and consulting services
to the public and businesses. Peer review, whether self-imposed
or mandated, has provided the public accounting profession with
an emerging market for a unique service. Peer review should not
be viewed solely as a regulatory requirement (whether state-imposed
or voluntarily self-regulated). Peer review represents an opportunity
for accounting firms to leverage their existing practice and knowledge
into this related service.
James Schmutte, DBA, CPA, is a professor of
accounting at Ball State University, Muncie, Ind. He has been a
technical reviewer for the Indiana CPA Society peer review committee
for more than 10 years.
John R. Thieling, CPA, is a sole practitioner in
Plymouth, Ind. He has been a peer reviewer for more than 30 years
and serves on and has chaired the Indiana CPA Society’s peer