Peer Review in 2019: What Every CPA Firm Should Know
Enhanced oversight is a valuable learning experience for your firm. Here is how to make the most of it.
Digital Exclusive - 2019
Self-regulation has always been a core tenet of the accounting profession, but it cannot exist without a strong practice monitoring program — hence the existence of the CPA firm peer review. Some will argue that peer review has become more punitive than remedial in the wake of the AICPA’s Enhancing Audit Quality (EAQ) initiative. I disagree. Remediation, though sometimes unpleasant, is not punitive. I remember as a child, when my dad was providing teaching moments (i.e., requiring me to repeat a chore I had not performed appropriately), his remediation seemed to be punitive. As an adult, I realize he was helping me understand what I had not done correctly. Peer reviews, when performed properly, not only assist firms in remediating non-compliance issues but also facilitate valuable learning experiences.
So, here are a few things every CPA firm should know about the peer review process.
What prompted the AICPA’s EAQ initiative?
A Department of Labor (DOL) study, performed more than three years ago, revealed non-conforming audit engagements in 39 percent of the population reviewed. Concerned by the high non-conforming rate and that of earlier quality studies on single audits (which showed an even higher rate of non-conformity), the AICPA Peer Review Board (PRB) launched an enhanced oversight program primarily focused on employee benefit plan and governmental audits to validate the non-conformity rates revealed by the regulator studies. The subject matter experts who performed these enhanced oversights not only validated the federal studies but revealed an even higher non-conforming rate of 43 percent. This ultimately led to the EAQ initiative.
How has the EAQ initiative affected the peer review?
Peer review is an integral part of the EAQ initiative. As a result, peer reviewers are facing greater scrutiny and oversight. Required reviewer training has also been significantly enhanced. But is this so bad?
In 2015, the Illinois CPA Society (ICPAS) argued in its INSIGHT Special Feature, “Audit Quality & the CPA Brand: The Search for a Solution,”
that issues of audit quality have a negative impact on the CPA profession — and the credibility, objectivity, and integrity of the CPA brand. ICPAS President and CEO Todd Shapiro said “CPAs have a vested interest in how the CPA brand is viewed and, therefore, a responsibility to ensure the highest quality. Remember, the CPA brand is your brand.”
Raising the performance level of all reviewers and increasing the consistent application of the peer review process is good for the profession and good for our brand. These changes increase the likelihood that firms fully understand and implement our professional standards. Positive outcomes that elevate the quality and reliability of our services is exactly what is expected of a self-regulated process. We must remember that the ultimate goal of all firms is to conduct engagements in accordance with professional standards, thereby serving the public interest.
What has the EAQ initiative uncovered?
1. Shortcomings in identifying non-compliance with documentation standards.
The enhanced oversight process revealed many peer reviewers were not effectively identifying non-compliance with the documentation standards. Reviewers were giving credit when a required audit procedure had not been documented (and possibly not performed). For example, firms were frequently found to fail to document eligibility testing in employee benefit plan audits. When questioned, firm personnel would point to a sign-off on the audit program and (sometimes) orally provide greater detail of the procedures they had performed.
Professional standards, of course, require documentation such that an independent experienced auditor can understand the nature, timing and extent of the procedures performed, the results and evidence obtained, and the significant findings, issues and professional judgments. One mindset says what is important is that the “work was done” and documentation is secondary. Though a focus on the outcome seems logical, we are not auditing logic. Documentation is critical and cannot be overlooked. As professionals, we are required to comply with professional standards, which includes adequate documentation. Not to mention the legal ramifications if you find yourself explaining to a jury why you failed to comply with standards.
Clearly, when peer reviewers were not holding firms accountable for documentation, they were not serving the firms’ interests.
2. A broad misunderstanding of professional standards for risk assessment.
Despite being around for more than 10 years, professional standards for risk assessment continue to be broadly misunderstood. For example, firms frequently fail to link planned procedures with assessed risk. In addition, firms regularly default to a substantive audit approach without performing a proper risk assessment, such as by documenting an assessed risk of material misstatement as low but performing all audit procedures as if risk had been assessed as high. Even more troublesome, firms have assessed control risk as other than high but have failed to test controls sufficient to validate a lower risk assessment.
Unfortunately, these misunderstandings extend broadly throughout the industry, encompassing both reviewers and providers of practice aids. The PRB has launched a special initiative to address this misunderstanding of the standards, including focused training for peer reviewers.
Expect your next peer review to pay particular attention to this area. In fact, it would serve your firm well to access the resources in the EAQ area of the AICPA website
What does this mean for your firm?
Reviewers are receiving additional training in the areas of deficit mentioned above and are being held accountable if they fail to properly bring them to the attention of firms. This is why many believe the peer review program has become punitive. Remediation of engagements that were not performed in accordance with standards does feel punitive; however, it is time to shift our thinking. The peer review process is educational and teaches firms how to perform and document the engagements in accordance with standards. Improvement is good for everyone.
As a profession, we must maintain peer review as an integral part of the profession’s self-regulation. In order to achieve this goal, our profession must have a robust and viable peer review program. A peer reviewer’s job is not to “see how much they can find that is wrong.” Rather, a peer reviewer should identify areas where the firm has failed to apply (or misapplied) professional standards, documenting such in their workpapers and recommending an appropriate course of action. So, when a peer reviewer presents a “matter for further consideration” or “finding for further consideration” form to you, accept their input for what it is — a way to elevate your knowledge and the services provided.
Of note, the AICPA publishes its Annual Report on Oversight each year, which contains data on the most prevalent areas of non-compliance encountered by peer reviewers in the previous year. It would serve you well to review this document annually to identify potential areas of improvement in your firm.
How should you select a peer reviewer?
In addition to assisting firms in remediating non-compliance issues, a peer review should be a great learning experience. Look for a peer reviewer who approaches the process with an educational mindset. Such a reviewer doesn’t just get the firm through the compliance part of the review; he or she will also educate and bring best practices and value-added service to the firm. These suggestions could be related to accounting and auditing but may also be in other areas of concern such as software solutions and staffing challenges.
Where can you find a peer reviewer?
ICPAS can help you find the right peer reviewer for your firm. Through its Peer Review Alliance
(formerly the Illinois CPA Society Peer Review Program) — a partnership between the Illinois CPA Society, its partner state CPA societies, and volunteers who serve on the blended peer review committees — ICPAS administers peer reviews for CPA firms headquartered in Illinois, Indiana, Iowa, Kentucky, South Carolina, West Virginia, and Wisconsin.
You may continue to select your firm’s team/review captain from qualified reviewers in or around your home state, just as you have always done. The Peer Review Alliance will provide assistance and consultation throughout the review process, from scheduling to acceptance and completion.
If you have any questions about scheduling a peer review for your firm, please call 800-993-0407 (option “6”) or send an email to [email protected]
G. Alan Long, CPA, CITP, CGMA, is the managing member of Baldwin CPAs.