Ms. Rachelle Drummond
Senior Technical Manager
AICPA Peer Review Program
American Institute of Certified Public Accountants
220 Leigh Farm Road
Durham, NC 27707-8110
Dear Ms. Drummond:
We welcome the opportunity to provide feedback to the American Institute of Certified Public Accountants ("AICPA") Peer Review Board in connection with the Exposure Draft of Proposed Changes to the AICPA Standards for Performing and Reporting on Peer Reviews dated November 10, 2015 (the Exposure Draft). Baker Tilly Virchow Krause ("Baker Tilly') strongly supports the AICPA's Enhancing Audit Quality (EAQ) initiative, and we are pleased to provide our comments on changes that the AICPA Peer Review Board has proposed to improve the transparency and effectiveness of peer review as an integral part of the overall EAQ initiative.
By way of background, Baker Tilly is a large, nationally recognized accounting firm, providing audit, accounting, tax and consulting services from offices located in 11 states, primarily in the mid-Atlantic and mid-West. We have approximately 300 partners and over 2,500 team members and our size places us among the top 15 of all CPA firms in the United States. Our clients range from public companies to smaller family owned businesses and our industry concentrations include commercial, construction and real estate, financial services, governments, health care, energy and utilities, employee benefit plans and not for profit. Baker Tilly has been actively involved in peer review since the inception of the program, including the involvement of several partners who have served on the AICPA's National Peer Review Committee. Additionally, Baker Tilly has performed more than 200 firm-on-firm peer reviews including peer reviews of several of the largest firms in the country.
The proposed changes to improve the transparency and effectiveness of peer review are necessary. In light of continued negative publicity surrounding ongoing inspections of audit firms and audit engagements by regulators such as the PCAOB, and more recently, the Department of Labor (DOL) May 2015 Report on Assessing the Quality of Employee Benefit Plan Audits, our profession appears to once again be facing a crisis in confidence with respect to audit quality and by extension, mounting questions over the efficacy and rigor of peer review. The DOL's observation in its recent report that "The audit study showed that the accounting profession's peer review and practice monitoring efforts have not resulted in improved audit quality or in identifying deficient audit engagements" (emphasis added) should serve as a wake-up call to the profession and peer review program that we can and must do more. The stakeholders who both rely upon our reports and who expect us to consistently perform our work to meet or exceed the high standards that govern our profession should also reasonably expect that we will hold ourselves accountable to enhance audit quality through the process of peer review. A lack of resolve, sufficient rigor, transparency, or candor in the ongoing administration of the program or the performance of peer reviews puts our profession at risk for increased regulation and oversight and further adds to public's perception that an audit is merely a commodity.
In addition to stating our overall support for the changes set forth in the Exposure Draft, we offer the following specific comments for your consideration as either near-term changes to the exposure draft or long-term changes to the Program and its standards.
FFC and Report Guidance Descriptions, Firm Responses, and Related Reviewer Considerations (System and Engagement Reviews)
As noted in the Explanatory Memorandum of the Exposure Draft, one of the steps in achieving the EAQ goal is to make peer review results more informative. Our interpretation of feedback obtained by the AICPA on the EAQ initiative suggests to us that the respondents are not overwhelmingly on board with the notion that the current peer review report is sufficiently clear and meaningful. The feedback also seems to suggest to us that if changes were to be made to the peer review report, additional information in the form of demographic information about the firm and some version of a hybrid reporting model (consisting of an opinion on the overall system of quality control and report on deficiencies) may be useful information for users to better understand, evaluate and use a peer review report. In addition, and apart from our interpretation of feedback received by the AICPA on the EAQ initiative, we believe that the regulatory reporting model which generally contains listings and descriptions of engagements with deficiencies and which garners more publicity than a peer review report adds to the public's confusion about audit quality.
As proposed, the revisions to the peer review report principally consist of clarifications, examples of which are stated in the Exposure Draft and include restructuring the placement of information under appropriate headings similar to a clarified audit report, clarifying the purpose of the report with a descriptive report title and clarifying the paragraph describing the "must select" engagements by indicating when only one engagement of a particular engagement type was made. While we believe that these changes are ultimately helpful to further a user's understanding of peer review reports, they appear to be incremental steps in what appears to be a need for a more transformative change. We therefore urge the Peer Review Board to give additional consideration to feedback received from the EAQ initiative and to seek additional stakeholder feedback as a basis to further study the extent to which more transformative changes may be needed to achieve the objectives of greater transparency and usefulness of peer review reports.
Enhanced Peer Review of the Firm's System of Quality Control (System Reviews)
The Explanatory Memorandum of the Exposure Draft describes several key future complementary and conforming guidance proposals which are scheduled to be presented at the May 2016 Peer Review Board meeting. One proposal is to enhance Sections 4500 and 4600 Guidelines for Review of Quality Control Policies and Procedures for Sole Practitioners with No Personnel and Firms With Two or More Personnel, respectively, with guidance to assist team captains and firms in identification of risks that a firm's system of quality control would not provide the firm with reasonable assurance of conformity with professional standards. Specifically, we understand that the checklists are intended to identify quality control risks by 1) expanding the analysis and assessment of the firm's system of quality control against best practice policies and procedures and 2) introducing new sample tests and procedures to assess the firm's compliance with its quality control procedures.
Our firm has seen drafts of the proposed revisions to the checklist and additionally, been exposed to the proposed changes through AICPA training programs such as the program entitled "Drive Your Edge With Audit Quality''. We believe that the changes set forth in the checklists are substantial. We expect there will be a need to create a stronger awareness within the profession through training and communications. We further expect that the changes will cause many firms to supplement or rewrite their quality control documents and related policies and procedures, and to make changes in their quality control practices.
Although these proposed changes are not expected to be considered by the Board until May 2016, the effective date that has been proposed for the final revisions to the standards and interpretations is for reviews commencing on or after January 1, 2017. If these changes are approved at the May 2016 Board meeting, they would be exceedingly difficult, if not impossible, for reviewed firms and peer reviewers to fully implement in a timeframe that would coincide with the proposed effective date of the revised standards and interpretations. We would therefore strongly recommend that the revised Guidelines, if adopted in May 2016, be made effective no earlier than for peer reviews commencing on or after January 1, 2018.
In addition to the foregoing comment, we have two recommended technical corrections specific to the Proposed Revisions section of the Exposure Draft, as follows:
- Paragraph 9 on page 54 in Appendix A appears to be a duplicate of paragraph 8 on page 53 in Appendix A.
- The second sentence of the third paragraphs appearing in a) the Illustration of a Representation Letter That Has No Significant Matters to Report to the Review Captain for an Engagement Review and b) the Illustration of a Representation Letter That Has Been Tailored for Significant Matters to Report to the Review Captain for an Engagement Review on pages 66 - 68 of the Exposure Draft should be deleted as it is not applicable for a firm who is eligible to have an engagement review. We also recommend that the third and fourth sentences of the same paragraph should be placed at the end of the same paragraph.
In conclusion, we commend the AICPA for initiating these important changes to improve the transparency and effectiveness of peer review. Peer review is critical to the viability and strength of our profession - and must be administered and performed with professionalism, utmost integrity, greater effectiveness and improved transparency in the reporting of results.
Baker Tilly Virchow Krause, LLP