The following article is part of a series designed to communicate to AICPA members about peer review in light of the AICPA leadership’s support for greater transparency in peer review reporting. The goal of the series is to describe what peer review is, how it works and how it has been enhanced.

Today, almost 33,000 U.S. accounting firms rely on peer review to demonstrate that their accounting and auditing practices meet the highest standards. Until they have undergone the process, some of these firms do not fully recognize the benefits of peer review. However, once the review is done, practitioners agree that a second set of eyes can help to improve what may already be a good process.

“A lot of small and medium size firms enter into the peer review process with some trepidation,” says Marshall Karp, a member of the Massachusetts Peer Review Acceptance Board. “On the other hand, as soon as I find some points they need to clear up, they like it. Even on engagement reviews, a lot of firms look forward to you coming in.”

Peer Review = Quality Control
Kevin Bowyer, a partner in the Florida firm, O'Sullivan Creel, says undergoing a peer review helps audit teams stay abreast of auditing and financial standards. Peer review
can also reveal issues that, when corrected, help improve processes. O'Sullivan Creel, for example, never used
to require disclosure checklists to be retained in their
audit files.

“But one of the things we found based on our last peer review was that it was helpful to retain them so you can always go back and look at the checklist to make certain it was completed appropriately,” he explains. “We now require a partner to sign off on the checklist.”

At O'Sullivan Creel, Kevin Bowyer is the partner in charge of both peer review and quality control, a combination that makes sense to Bowyer. “I don’t know how typical this is, but we’ve always done it this way and it works well for us,” he explains. “We have a quality control document that we maintain every year, and if we’re in compliance with that, our peer review goes smoothly.”

Like many firms, O'Sullivan Creel uses peer review as an opportunity to confirm they are performing quality audits and as a check against complacency. “When conducting an audit, it’s always in the back of our minds that the work papers could be inspected by a reviewer,” he explains. “Sometimes in getting work done for a client in an efficient and timely fashion there might be a temptation not to complete every document to a T. But knowing peer review is out there provides a check for everyone.”

However, Marshall Karp warns firms not to use peer review as a crutch and wait for the reviewer to tell them what kind of changes they need to make. “Some smaller firms rely on it, perhaps to a fault,” he says. “Oh, it’s the third year, time to make some changes.”

Kevin Bowyer suggests firms should periodically change their reviewers. “We had been using a firm for a number of years and decided to make a change just to make sure we weren’t becoming complacent and to get a fresh look at our
quality control systems and maybe to get a few new ideas,” he says.

Bowyer says he’s interested in becoming a peer reviewer “because it’s an opportunity to become better and to use our experience to help other firms.” He’s also interested in how other firms handle some of the administrative problems that arise at O'Sullivan Creel. “One of our biggest expenditures of time in getting ready for our most recent peer review was extracting information from our time and billing system and putting it into the AICPA format in order to single out how much time was spent on compilation, tax, etc. I’m curious to find out how other firms do that.”

Benefits of Being a Reviewer
Frank Betts, for example, an audit partner at Mississippi firm, Eubank & Betts, says being a peer reviewer has been a tremendous benefit to his own practice. Due to the nature of the review process, reviewers need to develop a valuable knowledge base and a broader expertise in accounting and auditing rules and regulations.

Betts remembers the early years, before peer review became mandatory for most CPA firms. “We had our first peer review in 1980,” he recalls. A lot of auditing back then was based on experience and open to interpretation.
Today, there’s much more specificity and greater expertise is essential.”

Betts explains that now reviewers and the reviewed have to deal with a quarter of a century worth of rules with which to comply. “We’ve reviewed some pretty powerful CPA firms,” says Betts. “You just don’t go into a large practice and say to them, ‘Hey you have to do it a different way.’ You have to know what you’re doing – bring your expertise and experience to the table.”

Betts believes in order to be a good peer reviewer you have to bring something extra, like specific industry or technical knowledge, from your practice to the table. This year, for example, he says many firms are confused about both
FIN 46 and the AICPA Code of Professional Conduct Rule 101-3 independence interpretation. FIN 46 provides guidance to improve financial reporting for special-purpose entities, and the AICPA’s Rule 101-3 concerns the
non-attest work a firm is allowed to perform for an attest client – including those that receive compilations.

“When we sent firms our peer review engagement letter we included the AICPA’s quality control guide, as well as an explanation of FIN 46 and AICPA Interpretation 101-3. We found the only firms that had a problem in these areas were those that didn’t read what we had sent them.”

Betts and other peer reviewers say they are constantly picking up tips and practices they can use in their own firms. “In general, discussions with firms about things like liability insurance, whether or not to go paperless, and hiring practices, provide us the opportunity to learn from others,” says Betts. “It’s a way to circulate best practices and good ideas. Just recently we reviewed a firm that saves the envelopes that come in with confirmations of accounts receivables or legal letters. We thought it was a good idea because it provides more information, like a postmark and a return address, not necessarily contained in the letter. Now we staple each envelope and letter together.”

Marshall Karp agrees that as a peer reviewer, he often runs into the same situations his own firm faces or has faced, so he can make a determination which firm, his or the reviewed firm, has a better procedure. “Being a peer reviewer is not only a way to apply your knowledge to assist other firms, but also to acquire a lot of useful knowledge that can be use to improve practice in your own firm. It’s been very advantageous to my practice. At the very least, it reinforces the right way of doing things,” says Karp.

As an example, Karp points to a peer review he recently performed. “The firm had already adopted three new SSARS standards prior to their official implementation date,” he recalls. “While I knew the standards and was prepared to peer review their implementation, they were standards my firm had not yet implemented. It gave me a better sense of what my firm needed to do to be compliant.”

Karp says as a sole practitioner, there is a certain pride in his participation in the peer review program. “It says, ‘Hey, I am solo, but I pay attention to professional standards just as much as any larger firm,’” he explains. “It also reminds me that maintaining those professional standards is key to my business success if I want to continue doing audits, reviews and compilations.”

For more peer review information and resources, visit the AICPA web site.

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