State Board Tackles Creation of New Quality Review Program
New Committee Would Provide State Oversight

By COLLEEN LUTOLF Trusted Professional Staff

ALBANY - Most people refer to it as a peer review. A new state law calls these practice monitoring assessments by another name - quality review. Whatever you call it, beginning in 2012, a new state law will require that every firm that provides attest services in New York state - except for the smallest of CPA firms - has one every three years.

The new accountancy reform law requires all New York CPA firms that per(SED). The law also requires, effective Jan. 1, 2012, all firms seeking to register or reregister a firm with the state, other than sole proprietorships with two or fewer accountants, to participate in a quality review of the firm's attest services once every three years, unless a disciplinary action warrants additional reviews. However, this small-sized firm exemption does not apply to any firm that performs:

• attest services for any New York state governmental agency;
• a governmental or proprietary function for New York state or any of its municipalities; or
• attest services specifically required to be performed pursuant to New York state law

These firms would be required to undergo an external peer review, in conformity with Government Auditing Standards of the U.S. comptroller general.

Under the proposed draft regulations discussed at the Sept. 16 meeting of the State Board for Public Accountancy, any firm that begins providing attest services or otherwise becomes subject to mandatory participation in the quality review program would have to notify the SED within 30 days of its status change and provide the SED with evidence of enrollment in an acceptable quality review program within one year of either the firm's initial registration date or the date of the firm's initial performance of services that would trigger a mandatory quality review. The proposal would require that the quality review be conducted within 18 months of the date the services were first provided.

However, the SED could, according to its own discretion, accept from a firm a peer review or peer review report which it deems to be the substantial equivalent of a quality review report, according to the proposed draft. In other words, a peer review conducted in another state where the sponsoring organization is the AICPA or that state's state society of CPAs, the state board's executive secretary, Daniel J. Dustin, said.

The details of how these quality reviews will be conducted and by whom is still being worked out in Albany, but the draft proposal the State Board for Public Accountancy was working on at its Sept. 16 meeting includes the creation of a new, three-person committee comprising New York state-licensed CPAs to oversee the new program, and that has the power to refer to the Office of Professional Discipline (OPD) those firms that are found not to be in compliance with quality review standards.

Another provision in the draft proposal would require firms that are not required to undergo mandatory quality reviews to submit a written request to the SED, explaining their basis for the requested exemption. If that provision remains in the final regulations, all CPA firms, regardless of their size or the services they offer, would need to take some action to make sure they are meeting the requirements of the new mandatory review program.

The latest draft was a very different document from what the board had initially voted to recommend to the state Board of Regents at its March 27 meeting.

"Apparently, from the questions we received from the Office of Counsel, the [quality review] regulations were too specific and too highly detailed," Dustin said at the meeting. He added that the revised model the board now had would be easier to implement.

The board shaved off about two full pages of text from the originally recommended quality review regulations. Much of the deleted text provided, like Dustin said, specific details, such as how the three-person committee - called the Quality Review Oversight Committee, or QROC - would conduct visits of sponsoring organizations and how it would evaluate these organizations'policies and procedures. Also struck from the new draft is any mention of a sponsoring organization's "peer review report committee" and the requirements one must meet to belong to one.

"We tried to define things in as broad a sense as possible," said Henry J. Krostich, who chairs the board's Quality Review Ad Hoc Committee.

Before delving into the proposed emergency regulations at the Sept. 16 meeting, Krostich noted that any firm that undergoes an external peer review, in conformity with Government Auditing Standards of the U.S. comptroller general, does not have to undergo a second quality review in order to conform to the law. He said there had been some confusion regarding that point.

"Only one peer review of the firm is required to be submitted under the [proposed] regulations," Krostich said.

However, he also noted that the proposed regulations require any firm that undergoes a Public Company Accounting Oversight Board inspection must submit a copy of the public version of its most recent inspection report to the SED as a condition of the firm's registration or reregistration.

This issue prompted much discussion later in the meeting, when Krostich proposed that an additional sentence be added to the proposed regulations to make a distinction that a second or - if it is a publically held company - third review is not necessary. State Board Chairman Richard D. Isserman recommended against adding additional language, but not before asking for input from the board. He got none.

"Your silence is deafening," he said.

Krostich reiterated that a clarifying sentence is necessary, although he noted that the language may need to be changed in the future if the government seeks to provide more regulatory oversight by requiring an additional quality review that may not conform to AICPA standards.

"It's ineffective," Isserman responded. "Why do they want to add something that is not necessary?"

The clarifying language was not added during the board meeting.

QROC

The acronym may read more like the call letters of a radio station, but the QROC is actually the proposed body described in the draft proposal that would oversee the state's new mandatory quality review program.

If the proposed regulations are adopted by the Board of Regents, the three-member QROC would also be appointed by the Board of Regents. Every committee member must be a licensed New York CPA, hold a current registration with the SED and may not be a member of the State Board for Public Accountancy or one of its committees. Compensation would be set in accordance with Education Law section 6506(4), which would allow appointees to be paid up to $100 a day for each day devoted to committee functions, plus "necessary expenses."

According to the proposed draft regulations, the QROC would be responsible for:

• receiving and approving quality review plans from entities desiring to be a sponsoring organization;
• monitoring sponsoring organizations to provide reasonable assurance that the sponsoring organization is providing an acceptable level of oversight over firms and reviewers participating in the program;
• informing the SED of any issues or problems relating to the quality review program which may require the SED's intervention;
• making an annual recommendation to the SED as to whether each sponsoring organization holds the qualifications necessary to continue as an approved sponsoring organization;
• periodically assessing the effectiveness of the quality review program and reporting to the SED any recommended modifications to the program;
• reviewing each quality review report submitted by a firm as part of their registration or reregistration to determine whether the firm is complying with the quality review standards;
• ensuring that any report received by a firm or reviewer is confidential and does not constitute a public record, which would not be subjected to disclosure unless the report is admitted into evidence in an SED hearing. In that case, the report would become a public document.

Reviewers, according to the draft proposal, would be required to retain documents associated with the conducted review, including review working papers, copies of the review report and any correspondence indicating the firm's concurrence, nonconcurrence and any proposed remedial actions and implementation. These documents would have to be retained for a period of time corresponding to the retention period of the sponsoring organization and shall be made available upon request of the QROC and for a period less than 120 days from the acceptance date of the review by the sponsoring organization.

The proposed draft quality review regulations also provide eight provisions that outline the criteria that need to be met to be a sponsoring organization and several provisions that outline the criteria for approved reviewers.

That criteria for approved reviewers include, among other things, being licensed or authorized to practice public accountancy in any state, and meeting the following competencies prior to commencing a quality review: A reviewer must have at least five years of experience performing attest services and have completed 16 hours of introductory training acceptable to the SED.

Dennis O'Leary, NYSSCPA counsel, pointed out that the new state law requires those individuals in a firm responsible for supervising attest services to meet certain competency requirements.

"If you believe the AICPA standards do that, you're covered," he said. "If you don't, I suggest you add that requirement."

O'Leary also noted that some of the language in the proposed regulations needed to be reworked, such as the phrasing that should be used regarding firms whose reviews would trigger an automatic action from the QROC to the SED's OPD versus when the QROC would use its own discretion in deciding to send review results to the OPD.

One scenario would allow the QROC to refer a firm to the OPD if the firm has "some deficiencies" and the firm received two successive reports from a reviewer approved by the SED; the next scenario states the QROC "may automatically" refer the firm to the OPD if the firm has "several deficiencies" and the firm was not in compliance with quality review standards.

"There are a couple of provisions where the referrals for disciplinary action are too ambiguous," O'Leary said. He pointed specifically to the contradiction of the "may automatically," phrase, saying the proposed committee would need more definitive guidance.

The board will take the suggestions under consideration, Krostich said.

Cathy Landau-Painter, KPMG's partner in charge of government affairs and a representative of The Accountants Coalition, said she gave six comments on the provisions to Dustin. She said she could make available a group of "tech folks" to answer any questions the board may have.

Dustin responded that the board "discussed at length" the suggestions and accepted or rejected the comments as it saw fit.

The board voted, 11-2-1, to accept the draft proposal as a working version of the proposed emergency quality review regulations.