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An Overview of the Peer Review Process

By Mark Rachleff, Quality Assurance Manager

If a firm is a member of the AICPA Division for Firms and performs either compilations, reviews or attestation (audit and other attest services), then it is required to have a peer review every three years under the AICPA practice-monitoring program. Partners of such firms that provide such services cannot be individual members of the AICPA unless their firm is in the Division for Firms. All partners of such firms must also be members of the AICPA. At present, New York, unlike most other states, does not require that firms with an accounting or auditing practice undergo peer reviews periodically. Nonetheless, as reported in this and other professional publications, the New York State Legislature is actively considering mandatory peer review for firms in New York state.

What Is the Role of the NYSSCPA in the Peer Review Process?

The NYSSCPA acts as administering entity for the AICPA in the administration of the peer review program. Under this delegated authority the Society schedules peer reviews (a firm must enroll in the program by accessing the AICPA website at www.aicpa.org), and processes the peer review reports and supporting work papers for review by our technical review group, which, in turn, submits the report and certain work papers to the Society’s Peer Review Committee. The committee acts as a report acceptance body on behalf of the AICPA. Please note that the AICPA promulgates peer review administrative rules and peer review standards, interpretations and quality control standards. It also acts as the final tribunal for disagreements between a firm and the Peer Review Committee regarding administrative matters and technical interpretations.

What Is the Role of the Peer Review Committee with Respect to My Peer Review?

The committee performs its own review and is responsible for formal acceptance of the peer review report. If the committee concludes that additional information is needed to determine whether the review should be accepted, it will defer its decision until receipt of such additional information, or request the peer reviewer to revise the report and supporting documentation, or both. After acceptance, a firm receives a letter stating that the peer review report has been accepted. If the report included findings of departures from professional standards (including quality control standards codified in Statements of Quality Control Standards), the committee will, depending on the seriousness of the departures, issue a conditional acceptance letter with stipulated follow-up action requirements. The firm must sign a copy of the acceptance letter and agree to a timetable to implement the recommended corrective action, and, upon completion, submit proof of compliance to the NYSSCPA.

Who Assigns a Peer Reviewer to a Firm, and How Are Fees Determined?

Generally, firms select their own reviewers. The peer review program provides a listing of firms that have expressed an interest in performing peer reviews and whose industry specialization matches that of the reviewed firm (i.e., they are considered a “peer”). The firm may make a selection from among the firms on this listing.

The fee for the review is a matter of private negotiation between the reviewed firm and the reviewer firm. The reviewed firm is also charged an administrative fee by the NYSSCPA, a third of which is billed each year during the three-year peer review cycle. The administrative fee is based on the size of the reviewed firm.

When Does a Report Have to Be Submitted to the NYSSCPA?

The firm and the peer reviewer must complete the review no later than six months from the end of the period reviewed. For example, if the peer review period is the 12 months ended Dec. 31, 2004, the firm’s copy of the peer reviewer’s report and the firm’s letter of comment and letter of response, if applicable, must be submitted to the Society by June 30, 2005. The firm has 30 days from the date it receives a letter of comment, if any, to submit a draft letter of response to the reviewer. Accordingly, the firm should schedule its review and obtain its reviewer’s approval of the letter of response in sufficient time to meet the “filing” deadline, or request an extension of the due date.

If the firm anticipates that it will not be able to complete the peer review process before the due date, it should request an extension in writing and provide the substantive reasons why it cannot complete its peer review by the original due date. The request should be submitted preferably 60 days before the due date. If a firm performs audits under Government Audit Standards (Yellow Book), it should consult with its peer reviewer and the Government Accountability Office regarding guidelines for granting extensions.

What Information and Documents Will the Peer Reviewer Request?

The best way to answer this question is to enumerate roughly in chronological sequence the more significant items that the reviewer must complete based on AICPA guidelines. The steps set forth below are for reviews (referred to as system reviews) of firms that perform audits or other attest services in addition to review-and-compilation accounting services. If a firm does not perform attest services or only performs compilations that substantially omit all disclosures, many of the enumerated steps are not applicable. The next article in this series will detail the process for firms that do perform only review or compilation services. (These reviews are referred to either as engagement or report reviews, depending on whether a firm performs only compilations that substantially omit all disclosures or also performs full-disclosure compilations or reviews.)

1. The reviewed firm will provide the reviewer with background information on the firm’s practice (compilation, review, audit clients and industries of clients). The reviewer will compare this listing to a copy of the background information the firm previously furnished to the NYSSCPA.
2. The reviewer will contact the firm to confirm:

a. The timing and expected exit conference date; and
b. That the firm will provide access to all engagements and documentation, and that it under- stands its responsibilities if it wishes to exclude an engagement from the review (it will have to get a waiver from the NYSSCPA regarding excluded engagements).

3. The reviewed firm will be asked to:

a. Furnish a copy of its prior review report (and letter of comments and letter of response, if applicable).
b. Agree with the reviewer on a 12- month period for the review, if it is the firm’s first peer review. Thereafter, it will need NYSSCPA approval to change the peer review period.
c. Provide a copy of a completed Quality Control Policies and Procedures Questionnaire, an engagement list, a listing of the firm’s professional personnel, and a copy of the firm’s monitoring documentation maintained since the last peer review.

i. If the firm does government audits, the Yellow Book general standards require a written quality control document, which will be requested by the reviewer.

d. Respond to questions (but not furnish evidence) regarding:

i. Its license to practice;
ii. Investigations by the AICPA or regulatory agencies;
iii. Allegations or asserted litigation;
iv. Any limitations to practice or limitations on access to records; and
v. Independence impairments.

What Is the Next Step in the Peer Review Process?

1. The reviewer will then make a preliminary selection of the engagements’ financial statements, work papers, and other engagement documentation based on the reviewer’s assessment of the firm’s inherent and control risk environment. The firm will have two weeks to furnish the documents to the reviewer. When the review commences, the firm will be informed of one engagement on a “surprise” basis.

a. If the firm performs engagements governed by the Yellow Book requirements or ERISA (Employee Retirement Income Security Act) or institutions subject to the 1991 FDIC Improvement Act, then at least one of each type of engagement performed must be reviewed. Failure to provide at least one engagement (the reviewer may conclude that more than one engagement is necessary) of these public interest sectors, even if the firm has received a scope waiver, may result in a modification of the reviewer’s report.

2. The firm and the reviewer will complete questionnaires on the firm’s quality control policies and procedures.
3. The reviewer will review the financial statements and work papers of the engagements, including the surprise engagement, and discuss deficiencies with the firm’s quality control department.
4. If the firm and the peer reviewer cannot agree on the findings, or if there are other unresolved peer review matters, the peer reviewer will consult with the NYSSCPA’s technical reviewer and Peer Review Committee to assist in the resolution of the issues.
5. The matters addressed in step 3 above are discussed with the firm at an exit conference, and, if appropriate, the peer reviewer will issue a letter of comments.

a. During the course of the exit conference, the peer reviewer will discuss with the firm recent developments in accounting and auditing affecting its practice. In addition, the peer reviewer may present one or more ideas for consideration with respect to potential improvements to the effectiveness or the operational efficiency of practice.

6. The peer reviewer must submit a copy of the peer review report, and, if applicable, the letter of comments, to the firm and the NYSSCPA within 30 days of the exit conference date.
7. The firm should submit a draft letter of response to the findings, describing the remedial action taken or planned to prevent a recurrence of the deficiencies noted in the letter of comments and report.

a. After receiving comments, if any, from the peer reviewer, the letter of response, along with a copy of the report and the letter of comments, should be sent to the NYSSCPA. If the firm still does not agree with the comments, it should discuss the areas of disagreement with the technical reviewer. If there is no resolution, the letter of response should discuss the reasons for the
firm’s disagreement.

8. The firm should not discuss or distribute a copy of the peer review report with or to firm personnel, clients or others until the report has been accepted by the Peer Review Committee.
9. The firm will receive a letter notifying it of acceptance of its peer review report, and, if applicable, request it to agree to submit proof of the follow-up action recommended by the committee as a condition of acceptance. After the committee has received confirmation that the follow-up action was satisfactorily completed, the final (unconditional) letter will be issued.

The next article will describe the peer review process for firms undergoing engagement or report reviews and also convey in greater detail some of the more frequent administrative and technical issues encountered during the course of the peer review process.

Note: At the time this article went to press, the New York State Legislature is actively considering legislation that would, among other things, make peer review mandatory, link peer review with licensing, and increase transparency of the results of the review. This article is the first in a series discussing the American Institute of CPAs’ (AICPA) peer review program. It is intended to provide a general understanding of the peer review process and the respective roles of the firm, the peer reviewer, and the New York State Society of CPAs, which acts as an administering agent for the AICPA. Subsequent articles in this series will focus on selected aspects of the program and suggest ways to ensure that your review is effective and informative.