Peer review is employed in science, medicine, engineering, mathematics, and law, just to name a few important fields of work. Why? Because experts in those fields are most capable of making informed judgments about specific applications of their profession.
Accounting is another profession in which peer review is used because accountants deal with complex scenarios for clients. The AICPA peer review program relies on highly trained professionals who review one another’s work according to the highest ethical and professional standards to produce a quality service and protect the public interest.
The program also continually evolves to drive further improvement. In 2014, the AICPA found deficiencies in the way a number of firms perform audits. The AICPA took steps to strengthen the peer review process that included bolstering the requirements for becoming a peer reviewer and enhancing the review of a firm’s system of quality control. Today, approximately 80% of firms required to undergo remediation after a deficiency improve their scores by the time of their next peer review.
Although it began in the 1970s as a voluntary program, virtually every firm that performs accounting or auditing work is now required to go through the peer review process, which examines the design and operating effectiveness of an accounting firm’s quality management system every three years. Firms receive one of three grades: Pass, Pass with Deficiencies or Fail. Since peer review is required by state accounting licensure boards, firms that pass with deficiencies or fail must undergo a rigorous, point-by-point process to improve quality. This process is called remediation, and firms that fail remediation are in danger of having their license revoked.
There are two types of peer reviews:
In a system review, a peer reviewer evaluates the CPA firm’s system of quality control for performing accounting and auditing work. This includes an examination of a sample of the firm’s engagements.
In an engagement review, a sample of the CPA firm’s accounting work is studied and appraised. CPA firms that undergo engagement reviews do not perform audits, but perform other accounting work including reviews and compilations, which represent a lower level of service than audits.
The CPAs who perform peer reviews are experts of the highest caliber. They are required to be an active, non-suspended member of the AICPA, to be licensed as a CPA, and to be currently active in public practice at a supervisory level in the accounting or auditing function of an enrolled firm.
Peer review teams include experts in highly specialized engagements such as single audits and employee benefit plan audits, and peer reviewers are required to have substantial continuing professional education on subjects related to accounting, auditing and quality control. Meanwhile, performance of peer reviewers on their reviews is even scrutinized and subject to a review process that can lead to disciplinary procedures when issues arise.
A special emphasis is placed during peer review on highly specialized engagements and those with an extra public interest focus such as single audits and employee benefit plan audits. Firms that perform these services are required to include them as part of their peer review process, and thus these are known as “must-select engagements.”
The importance of peer review
Peer review is meaningful for many reasons:
Audits need to be performed in accordance with professional standards. Financial statements are used by management, investors and regulators to make important decisions. An audit performed according to professional standards provides critical assurance on the financial statements, and peer review assists in upholding those standards.
Peer review is built around accountability. CPA firms and individual accounting professionals are held accountable by their peers. Firms and individuals that do not perform well go through a remediation process to improve quality, and in the most serious cases, the state board can revoke their CPA license.
Peer review provides transparency. Many peer review reports are publicly available via AICPA’s Peer Review Public File. Users can see if a firm is enrolled and the date of the firm’s last peer review. If a firm has joined the AICPA’s Employee Benefit Plan Audit Quality Center, Governmental Audit Quality Center, or Private Companies Practice Section or has volunteered to share their results, users can see their peer review report and other important documents. More transparency is good for users of audits, and it protects the broader public interest represented by the audited organizations.
Ultimately, the peer review process enables public trust in the audit process because it provides an opportunity for practitioners’ work to be reviewed by those most qualified to do so — their fellow auditors. The dedication and expertise of peer reviewers helps them contribute to quality that the public can rely on.