Peer Review: How Well Does It Fit the Profession?

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• Report review is somewhat like a management letter. Report reviews are done for CPA practices that issue compilations that omit most disclosures. They are performed off-site and are restricted to the contents of the compilation reports that the review team examines. Reviewers can make recommendations for improvement, and the reviewed firm does not receive a “pass” or “fail.” If the reviewers make no comments, the technical reviewer (in New York, a member of the NYSSCPA staff) can accept the review without the peer review committee (PRC) of the agent organization (which in New York is the
  NYSSCPA) reviewing it further.
• Engagement review encompasses the evaluation of reviews, compilations with disclosures, and agreed-upon procedure engagements under the Statements on Standards for Attestation Engagements (SSAE), but not audits. After the technical reviewer analyzes the review team’s report, it is submitted to the PRC, which determines whether to accept the review team’s and the technical reviewer’s recommendation, which takes the form of an unmodified, modified, or adverse report. An unmodified report is basically a clean bill of health. It may, however, include a letter of comment (LOC), which is a recommendation for improvement of items that are not a material departure from professional standards. The reviewed firm must respond in writing to an LOC. LOCs are generally required for modified reports. In an adverse report, all findings are included in the body of the report and no LOC is issued.
• System review is for firms that perform audits or examinations under the Statements of Auditing Standards (SAS) or Government Auditing Standards (Yellow Book), or examinations of prospective financial information under the SSAEs. It focuses on the firm’s system of quality control. Review steps include staff interviews, examination of professional hiring and library resources, and the firm’s ongoing monitoring of its quality-control system. In addition, engagements and their related workpapers are reviewed.

Although most people think that every firm is peer reviewed, 25% of the states, including New York, do not require peer review for licensing. Moreover, although it is commonly believed that every peer review is as extensive as a system review, in New York only about 47% of all reviews are system reviews. Nationally, peer review is a requirement of AICPA membership, and any firm that is not reviewed every three years will be dropped. In addition, GAO standards require peer reviews for auditors of governments and certain other entities. Firms that are registered with and inspected by the Public Company Accounting Oversight Board can choose to also join the AICPA’s Center for Public Company Audit Firms (CPCAF), which requires participation in the CPCAF peer review program.

Rethinking How Well Peer Review Fits

Fundamental concerns about peer review crystallize into important issues. Some say we should keep the current three types of reviews because they make sense in terms of what is reviewed. Others believe that system review standards should extend to all reviews, although others say that a one-size-fits-all program cannot work. Some people believe the current program is too checklist-focused, and that a broader, quality review is necessary. However, some people say that such changes would be overkill and cost-prohibitive.

Please share with me your thoughts on this subject. I always value members’ input, and the dialogue will help the Society focus its agenda.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA
lgrumet@nysscpa.org