November 1999

AICPA Revises Peer Review Standards

Creates New Report Review, Redefines Reviewer Rules

By William Prue, CPA

On October 5, the AICPA Peer Review Board adopted revisions to its Standards for Performing and Reporting on Peer Reviews and the accompanying interpretations. The new standards create three types of review, including a new report review, and revise rules governing who can perform peer reviews.

The changes are effective for peer reviews commencing on or after January 1, 2001. Most of the revisions relate to firms that do not perform engagements under the Statements on Auditing Standards (SASs) and examinations of prospective financial information under the Statements on Standards for Attestation Engagements (SSAEs), or what was formerly known as an off-site review.

"I welcome the changes because they streamline the process for many small firms while retaining the overall integrity of the peer review program," said Henry Krostich, chair of the NYSSCPA Peer Review Committee and a member of the AICPA Peer Review Board and the PRB Standards Task Force, which drafted the revised standards.

Three Types of Reviews

The changes create the following three types of peer reviews--system, engagement, and the new report:

* System Review--Firms that perform engagements under the SASs or examinations of prospective financial information under the SSAEs will have a system review--essentially the same as the current on-site peer review with only a name change.

* Engagement Review--Firms not required to have a system review (and not eligible to have a report review discussed below) will qualify for an engagement review. It is similar to the current off-site peer review (separate report and letter of comments, technical review, committee acceptance, monitoring actions, etc.); however, its objectives also include an evaluation of whether the reviewed firm's working paper documentation conforms with the requirements of Statements on Standards for Accounting and Review Services (SSARS) and the SSAEs applicable to those engagements in all material respects. The engagement review does not express an opinion on the reviewed firm's quality control system, or the firm's compliance with its own quality control policies and procedures or quality control standards overall. The reviewer will merely determine conformity with SSARS and the SSAEs. Examples of the reviewed documentation include the management representation letter and matters covered in the accountant's inquiry and analytical procedures.

* Report Review--Firms that only perform compilations that omit substantially all disclosures can have a report review. One major change from the exposure draft's proposals is that final standards require at least a technical review and possibly acceptance by the administering entity's peer review committee in order to provide a consistency in the application of standards. (In New York state, the NYSSCPA administers the peer review program for the AICPA.) The peer review committee also may impose monitoring actions on the firm and reviewer.

Other changes govern the peer reviewer. The revised standards designate the individual who actually performs an engagement or report review as the reviewer. The entity administering the peer review must approve that reviewer and, in unusual circumstances, any additional reviewers.

If a firm's most recent review was a report review, then the firm's members cannot perform, or have the responsibility to accept, any peer reviews. To perform engagement and report reviews or have the responsibility to accept reviews, the member's firm must have received an unmodified/unqualified report on its quality control system or an engagement review (or, until phased out, an off-site peer review). If the reviewer's firm's most recent review was not a system review, the peer reviewer must have performed and reviewed the same type of engagements as the reviewed firm.

The standards also maintain the current requirement that all peer reviews and the persons performing them are subject to oversight by the AICPA and the administering entity.

Comment Period Impacts Final Proposal

The exposure process for the new standards generated more than 300 written comments from both members and others involved with the peer review process. Several of the final revisions, as noted above, differ from those proposed in the AICPA's exposure draft issued last May. For example, the original proposal required firms that perform review engagements to have a review of their quality control systems. The new standards state that these firms must have an engagement review that evaluates only conformity with SSARS and SSAEs and not the firm's quality control system or overall compliance standards. Other differences from the exposure draft govern the report review. The Society's Peer Review Committee, for example, was among the groups that raised the issue of a technical review and other concerns in strengthening the report review.

See page 10 for questions and answers on the revised peer review standards. In a related matter, AICPA Council at its October meeting authorized a membership ballot on changes it approved to its bylaws to require peer review for individual CPAs who perform compilations. See the article on page 7 for more details. *