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State Board Report

July 2015

The past, present and future of peer review were considered by a Regional Meeting panel composed of NASBA Vice President – State Board Relations Daniel J. Dustin, Compliance Assurance Committee Chair Janice L. Gray (OK) and Regulatory Response Committee Chair W. Michael Fritz (OH). Mr. Dustin looked at how the State Boards responded to learning firms doing employee benefit plan audits were out of compliance with peer review; Ms. Gray reviewed recent changes that have been made to the AICPA peer review program; and Mr. Fritz summarized NASBA’s comments on the AICPA’s paper on peer review of the future.

Mr. Dustin reported that the Department of Labor had asked the AICPA in 2013 to confirm that 4,918 audit firms had participated in the peer review program. The AICPA became aware that 21 percent of the firms doing audits of employee benefit plans were not in compliance with peer review requirements, because they were: failing to enroll in peer review, or to have the appropriate type of peer review (system vs. engagement) or to report "must select" engagements to their peer reviewer. The State Boards’ most common response to learning of this situation was to verify the firm’s registration and then to issue an administrative warning to bring the firm into compliance. Some imposed discipline on the firms.

Ms. Gray reported that in the fall of 2014 new requirements were approved and changes were made to the quality assurance materials by the AICPA. Peer reviewers have to verify the firm’s license to ensure the firms are registered where they are practicing. In the revised representation letter, firms have to agree that if the representation letter is incorrect it could be used as evidence of their non-compliance with the peer review requirement. When misrepresentations occur the peer review report could be recalled and the State Board notified of that recall. A hearing panel would determine termination from the peer review program or require a replacement peer review, and re-enrollment in the peer review program would be subject to the approval of a second hearing panel. As of January 1, 2015, consecutive pass with deficiency or fail reports are to be referred to a hearing panel.

Ms. Gray noted that the AICPA is also focusing on peer reviewer performance and requiring as of May 5, 2016 that reviewers must complete annual on-demand training with competency assessment. To be a team captain, the peer reviewer must have been in public practice within the last five years and have experience in the area in which the audit was performed.

Mr. Fritz commented that peer review is at a crossroads, with the profession either continuing to monitor quality as it has done in the past or to "go down a new path and embrace change." He summarized some of the key items in NASBA’s comment letter on the AICPA’s "Evolving the CPA Profession’s Peer Review Program for the Future" concept paper. The letter supports the AICPA’s efforts to improve audit performance and quality, recognizing that enhancement in the quality of peer review is a critical element to any changes in practice monitoring. NASBA does have concerns on how some of the proposals would impact non-AICPA member firms and how electronic information could be standardized.

A key point was that the concerns of the State Boards need to be considered in the new monitoring system. As State Boards would need to continue to receive firm results as part of their regulatory process, a parallel process may need to remain in place to the monitoring system being proposed for a long time. The letter supported the use of engagement quality indicators for a firm’s internal system of monitoring quality control. NASBA noted that peer reviews can only succeed if their work is supported by appropriate consequences and an effective enforcement mechanism. Mr. Fritz said he believes there will be continued cooperation by the AICPA and NASBA on this project.

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