PEER REVIEW

Celebrating 25 years of peer review

BY ROBERT M. MOORE JR., CPA.

Did you know that the American Institute of CPAs (AICPA) Peer Review Program is 25 years old this year? Peer reviews can be challenging and sometimes a little painful, but if taken seriously, they can also be a chance to significantly improve a firm’s audit and accounting practice. Though I am heavily involved in the peer review process, I am not exempt from the challenges of preparing for and undergoing the peer review for my firm.

The program, administered by the VSCPA, was initially known as the Quality Review Program and now serves as the primary peer review program for public accounting. The structure of peer review remains relatively unchanged, but the program has certainly matured over the years and has continued to develop into the sophisticated program that it is today.

GENERAL OBSERVATIONS

Anyone who has worked in public accounting knows that the guidance we must follow on a daily basis is in a constant state of change, including the way we audit, documentation requirements, reporting requirements, ethical standards, tax matters and so forth. Certain firms deal with the changing environment with ease. Other firms have trouble dealing with the changes and often find that their work does not conform to professional standards. The causes of these problems vary, but often can be traced to the leadership within the firm and the firm’s failure to place emphasis on their quality control system. In my observation, firms that have had multiple peer reviews have improved over the years. Many of the peer reviews for these firms often have few findings of significance and serve as an affirmation that the firm’s culture is sound and is grounded in professional standards.

Characteristics of firms with successful peer reviews include:

>> Leadership dedicated to excellence in audit and accounting matters

>> Continuing education that is current, balanced and relevant to the firm’s practice

>> High standards for documentation and a comprehensive working paper structure

>> Subscription and effective implementation of comprehensive third-party quality control materials

>> Effective policies and procedures pertaining to acceptance of clients and engagements and review of engagements at multiple levels

>> Perpetual monitoring procedures that ensure a properly designed system of quality control and compliance with firm policies and procedures

On the other end of the scale, however, there are firms whose quality control systems are characterized by significant problems. Leadership in these firms does not place the proper emphasis on the importance of conforming to professional standards. Their quality control systems often include third-party quality control materials that are out-of-date or not properly implemented within the firm. The firm’s professional personnel often take inappropriate continuing professional education and are not properly trained for the complex and changing environment of the audit and accounting world. The firm’s monitoring of its practice is sometimes minimal and problems that exist are not identified properly and corrected promptly. Peer reviews of these firms are generally complicated, and often result in engagements that do not conform to professional standards. In those situations, peer review can be a very unpleasant process for both the reviewer and reviewed firm.

COMMONLY NOTED ISSUES

Many of the problems noted in peer reviews, some significant and some not so significant, relate to newly issued standards or standards that are complicated and difficult to apply. It puzzles me when firms have relatively significant audit and accounting practices, yet spend

PEER review

so little effort in keeping up with the changes that directly affect such an important part of their practices. I have also seen firms that have a significant investment in practice aids and education, but do not effectively use those aids or practice what they have been taught.

The reporting on compilation and review engagements was changed by the Statements on Standards for Accounting and Review Services (SSARS) 19, which became effective for compilation and reviews engagements with periods ending after Dec. 15, 2010. Even though this pronouncement has been in effect for several years now and has been the subject of numerous CPE programs, many in public accounting have not adopted the new reporting requirements and are still using the “old” report formats. Engagements using the old report formats are deemed to be nonconforming; firms may have to take certain corrective actions to ensure they are aware of future changes affecting their practices.

The reporting for audit engagements also changed significantly for periods ending after Dec. 15, 2012, with Clarity Standards. These reporting requirements, along with other changes to professional standards, received significant coverage in CPE courses leading up to implementation dates, yet many accountants are not aware of and have not implemented any of the changes. Audit reports that do not incorporate these standards also do not conform to professional standards.

Common missing disclosures recently noted in peer reviews include the failure to disclose tax years that remain open and subject to examination by taxing jurisdictions; the date to which management has reviewed subsequent events; and disclosing the fair value hierarchy of investments. These are generally not considered to be significant departures from standards, but do indicate that more recently required disclosures are those commonly missed in financial statements.

There have been significant changes to independence considerations to recent years, particularly to engagements subject to Government Auditing Standards. Many firms have been slow to conform to the new standards, which often results in substantial noncompliance.

Monitoring a firm’s practice is an important element of any quality control system to ensure adequate design and compliance. Peer reviewers have noted in many instances that this process is often overlooked by firms or not documented properly. The scope of monitoring procedures includes a review of firm policies and procedures, independence issues, continuing professional education, human resource issues, acceptance and continuance of clients and engagement performance, among other procedures. The performance and documentation of monitoring procedures should not be overlooked.

There are many other areas identified over the years that are too numerous to discuss here. Peer reviewers are charged with the responsibility of not only identifying these issues, but also determining the cause of the issues within the firm’s quality control system. In doing so, appropriate recommendations for improvement can be made and firms can implement changes and improve their audit and accounting practices. Firms should emphasize the importance of dealing effectively with the issues noted in their peer reviews.

THE MFC PROJECT

On July 1, 2013, the Peer Review Program implemented a positive change that will be a benefit to the peer review process. On this date, Matters for Consideration Forms (MFC) went online through PRISM, the AICPA’s Peer Review Information System Manager. As you may know, MFCs are generated on peer reviews upon the occurrence of issues noted in the course of peer review performance. In prior years, these forms were independently generated and any means of summarizing issues noted on peer reviews was a laborious process based on information that was not always clearly defined. The new process requires the completion of the MFC forms online, standardizes professional references related to the matters and has safeguards to ensure the completeness of the forms. Forms, completed on the AICPA website, are exchanged between the reviewers and reviewed firm through email. The ability to identify and quantify problem areas in the profession is a great value to the profession. The process is just over a year old now, and the results are being analyzed.

CONCLUSION

The Peer Review Program has been a positive force in the profession over its 25 years, increasing the quality of work performed by firms. Firms being reviewed should look for reviewers not only to meet compliance issues, but also to add value to their practices. The good ideas and practices that are exchanged benefit everyone involved. Look at the peer reviewer as a resource to help improve your practice. The public depends on our profession for many services; peer review helps us to do it right.

As the program matures, the Peer Review Program faces the aging and retirement of many of its reviewers and the program is in constant search for peer reviewers. Getting involved will require some education and performing peer reviews may require some travel, but it is a learning experience that exposes CPAs to other practitioners and can be a rewarding part of a CPA’s practice. n

ROBERT M. MOORE JR., CPA, is a member of Boyce, Spady & Moore PLC in Suffolk. He is an original technical reviewer in the American Institute of CPAs (AICPA) Peer Review Program and a former VSCPA Board member. * rmoorejrcpa@yahoo.com connect.vscpa.com/BobMoore