The times they are a-changin'
What's new with the AICPA peer review program
December 2016/January 2017 Footnote
I doubt that Bob Dylan had peer review on his mind as he crafted the lyrics for his classic song, but the theme is certainly relevant to the current peer review environment.
The AICPA in 2014 issued a discussion paper, Enhancing Audit Quality: Plans and Perspectives for the U.S. CPA Profession, as part of an overall strategy to improve audit quality. It includes several considerations, one of which is to update and improve the peer review process.
Accordingly, the peer review program is being evaluated to ensure it is appropriately designed to help improve the quality of audits and other attestation engagements performed. This evaluation includes the administration of the peer review program (both at the AICPA and local administering entity levels), the peer review standards, the performance of the administering entity report acceptance bodies (RABs), and the performance of peer reviewers.
The objective: to improve the overall quality of the peer review process, which in turn should contribute to an overall improvement in audit quality.
Reviewer qualifications and training
Among the most significant changes to peer review requirements were those related to required experience and/or training of peer reviewers, which were effective for peer reviews commencing on or after May 1, 2016. Those changes include:
- Reviewer training in "must-select" industries. Reviewers of engagements in must-select industries (employee benefit plan, governmental and single audit engagements) are required to complete designated peer review courses related to these engagements prior to being approved as a peer review team member assigned to them.
- Reviewer experience in "must-select" industries.
- Reviewers assigned to must-select engagements are also required to have current experience in a preparer, reviewer or supervisory role (as compared to the prior standard, which only required experience with these engagements within the prior five years).
- Reviewer firm membership in AICPA Audit Quality Centers. Reviewers of must-select engagements must be associated with a firm that is a member of the relevant Audit Quality Center, if an AQC exists. (Note: There are currently Audit Quality Centers for governmental and employee benefit plans.)
Reviewer performance considerations
The effectiveness of the peer review process is dependent upon the performance of peer reviewers. Therefore, changes have also been made to identify, communicate and evaluate reviewer performance issues on a timelier basis. These changes include:
- Specific classification of reviewer performance issues by the administering entity.Reviewer deficiency feedback is required to be classified as a "reviewer performance deficiency," or a "significant reviewer performance deficiency."
- Remediation and removal of deficient reviewers. The remediation and/or removal process of deficient reviewers is accelerated from 150 days to 30 days for remediation, and 330 days to 90 days for removal.
- Deficient reviewer appeal process. Appeals were previously made to the committee that imposed a corrective action for the reviewer. Appeals now are made directly to the AICPA Peer Review Board.
Enhanced oversight process — review of must-select engagements
In addition to the new requirements and changes in the peer reviewer evaluation process, peer reviewer performance in the must-select categories of employee benefit plan, governmental and service organization control (SOC) engagements is also being evaluated through an "enhanced oversight" process.
The enhanced oversight process is designed to evaluate whether peer reviewers are forming appropriate conclusions as to whether engagements in these must select categories were performed in accordance with professional standards; i.e., whether the engagement reviewed was properly classified as "conforming" or "nonconforming."
Engagements are selected for enhanced oversight through two separate processes, either random or targeted. The targeted selection of engagements is generally directed at high-volume reviewers and/or reviewers with documented performance deficiencies. Engagements selected for enhanced oversight are not known to the reviewer or reviewed firm until after the peer review has been performed and submitted to the administering entity.
It is important to understand that the enhanced oversight reviewers are considered experts in these specific types of engagements. Their objective is to conclude whether the engagement was performed in accordance with professional standards and to evaluate whether the peer reviewer reached an appropriate conclusion on a specific engagement. As such, they are not expected to have a detailed understanding of the peer review process or form conclusions on overall peer review results.
The enhanced oversight process was not only continued in the 2016 peer review season, but expanded to include an increased number of reviewers and engagements.
Enhanced oversight — administering entities and report acceptance bodies
In addition to improving reviewer performance, addressing reviewer deficiencies and implementing the enhanced oversight process, steps are also being taken to improve the performance of administering entities and their report acceptance bodies (RABs).
To meet this goal, the members of the Peer Review Board's Oversight Task Force, assisted by members of the AICPA Peer Review staff, will provide additional oversight of the RAB meetings of the various administering entities. This oversight is generally conducted by observing RAB meetings, either in person or by conference call, after which the administering entity and RAB will receive feedback and suggestions for improvement in the report acceptance process.
Upcoming peer review changes
In addition to the aforementioned changes, which have now been in place for the 2016 peer review season, there are forthcoming additional changes intended to improve the peer review process effective for reviews commencing on or after Jan. 1, 2017. Note that most of these changes are related to the performance of system reviews. The changes are as follows, which can be found in more detail in the October 2016 Peer Review Alert:
- Requirement for team captains to acknowledge that they have read the AICPA Peer Review Alerts.
- Requirement for team captains to review the representation letter from the firm's previous review, in addition to the prior peer review report and FFCs issued to determine whether the actions taken by the firm addressed prior findings.
- Completion of a new form (PRP Section 4500 or 4600) related to the review of the design of the firm's system of quality control, as well as completion of a new form (PRP Section 4550 or 4650) related to the testing of the firm's compliance with their system of quality control.
- No longer complete the managing partner questionnaire. This has now been incorporated into the team captain checklist.
- Conduct a closing meeting to discuss the preliminary results of the peer review. This closing meeting is separate from the exit conference. Note that this also applies to engagement reviews.
- Changes to the Peer Review Report, which are designed to more effectively communicate the peer review process and results of the review.
- Incorporation of separate firm representation letters for system reviews and engagement reviews.
Seek out more information
As this article only summarizes recent and current changes in the peer review process, all peer reviewers, and particularly peer review team captains, should review the full details of these changes. In addition to the Peer Review Alerts, the AICPA has a specific peer review page that provides a wealth of information to peer reviewers. Make sure you give them a good read so you're not left blowin' in the wind.
Brian Bluhm, CPA is the director of assurance services for Eide Bailly LLP. He is a member and past chair of the MNCPA Peer Review Committee, as well as a member of the AICPA Peer Review Board and AICPA National Peer Review Committee.