Rebuilding peer review; Exposure draft outlines proposed changes and call for transparency.

It could be the end of the world as we know it. At least, the end of the peer review world as we know it. A new exposure draft outlines provocative changes to the peer review process, from changes to the grading system to enhanced options for sharing the results.

[ILLUSTRATION OMITTED]

On April 16, the AICPA Peer Review Board issued Exposure Draft of Proposed Revisions to the AICPA Standards for Performing and Reporting on Peer Reviews, which includes a mechanism for firms to effectively comply with state board licensing requirements and increase transparency for peer review results.

The draft culminates several years of work in which special task forces and the AICPA Board of Directors thoroughly reviewed the current AICPA Peer Review Program to ensure it was meeting the original goals for which it was created--continually enhancing the quality of accounting, auditing and attestation services performed by AICPA members in public practice.

The environment in which public accounting firms are working is vastly different than in 1988 when the AICPA Peer Review Program was adopted. That was before the spate of corporate accounting scandals questioned the integrity of public company financial reporting and to some degree, quality control standards in public accounting practices.

Today's environment is full of new business and regulatory mandates that are forcing greater transparency in all facets of business. State Boards of Accountancy (BOAs) are increasingly calling for greater access to, and involvement with, peer review to ensure more consistent quality control standards. Currently, 39 states require peer review as a condition of relicensure.

There has been much debate about the issue of peer review transparency, but the AICPA and most state CPA societies have agreed on one thing--if there is to be greater peer review transparency, the profession must take the lead to avoid additional regulation and the erosion of consistency in the process.

As a result, the AICPA undertook a full evaluation of the current Peer Review Program to find solutions that would maintain uniformity of the program nationwide while preserving the profession's role in the peer review process and its public protection mandate.

The AICPA Board of Directors conducted an online poll of users and then convened a task force to review the results and issue recommendations, Ohio Society member Lee Wunschel, partner with Lublin, Sussman Group LLP in Toledo,, chaired the AICPA task force.

According to Wunschel, the task force's most significant recommendation is to move firms toward greater voluntary transparency in a way that ensures they will not be adversely affected.

"In today's environment, we expect our clients to be more transparent with their financial statement reporting and disclosure. We owe it to the public and to companies considering our services to be no less transparent in our professional practices," Wunschel said.

An estimated 63% of firms performing audits already make some aspects of their of their peer review results available outside their firms. Many other firms voluntarily make peer review reports public in response to either client requests or simply to demonstrate their commitment to maintaining a high standard of quality work.

If there us to be greater peer review transparency, the profession must take the lead to avoid additional regulation and the erosion of consistency in the process.

This illustrates that a majority of firms are already embracing peer review transparency and using it as a credentialing tool to bolster client and public confidence in the CPA profession.

But despite regulators' growing call for more public exposure, many firms don't believe transparency should be mandated. Therefore, the AICPA decided to facilitate voluntary disclosure of peer review information to state BOAs through an amended process that makes it easier for firms to comply with regulatory requirements.

Wunschel is confident the new proposed standards will only enhance the peer review process and make firms more comfortable with the prospect of transparency. More details on the actual process will be released by the AICPA later this year.

Peer review reporting reengineered

The task force recommendations also include changes to the peer review reporting process, specifically a new grading scale and clearer language. The rationale was that if firms were going to make their reports public, they should be written in concise, understandable language that a lay person could easily interpret and use.

Significant changes to the Standards include:

* Creating Standards that are more principles based. All guidance has been reevaluated, reengineered, updated and clarified.

* Defining more clearly the terms "matter," "finding," "deficiency" and "significant deficiency," describing how these terms may affect the type of report issued on a system or engagement review.

* Defining the grading scale more clearly; eliminating use of the term "substandard" so that firms undergoing review now receive a pass, pass with deficiency or fail.

* Expanding the use of existing peer review practice aids to communicate findings to the reviewed firm and allow the reviewer to receive related written responses that don't affect the opinion or type of peer review report issued.

* Creating a new, more understandable and easier to use peer review reporting model for system and engagement reviews, with proposed wording that will make them shorter and more concise.

[ILLUSTRATION OMITTED]

* Eliminating the separate Letter of Comment, incorporating all comments into the actual report, making the reporting model more efficient.

* Folding report reviews into engagement reviews while maintaining several attributes of the report review process and making other revisions to engagement reviews

* Providing clearer definitions for what constitutes a repeat finding --the disclosure, presentation or measurement finding should be the same or very similar to that noted in the previous review in order to be noted as a repeat finding.

* Recommending merging the AICPA Peer Review Program with the Center for Public Company Audit Firms (CPCAF) Peer Review Program, creating more uniform assessment standards and a more effective process for how firms are evaluated nationwide.

Joe Weaver, a partner in Weaver & Evans, Columbus, and chair of The Ohio Society's Peer Review Committee, thinks the changes are positive for reviewers and firms undergoing reviews.

[ILLUSTRATION OMITTED]

"With the current system, a firm could receive a positive report yet still have a separate letter of comment outlining items to be addressed," he said. "If adopted, the new Standards will incorporate all comments and recommendations into one report."

This makes it clearer for those who may want to review the reports.

Weaver also said eliminating the report review will require firms to provide a plan of action to correct any findings, deficiencies or significant deficiencies--which helps improve quality control standards throughout the profession.

When new standards take effect:

If adopted, the updated AICPA Standards for Performing and Reporting on Peer Reviews would become effective for peer reviews commencing on or after Jan. 1, 2009.

Members are encouraged to review the Exposure Draft in detail and provide comments to the AICPA Peer Review Board by June 30. To review the Exposure Draft, visit the AICPA Web site.

[ILLUSTRATION OMITTED]

Amy Johnson is senior manager, public relations for The Ohio Society. She can be reached at ajohnson@ohio-cpa.com or 800.686.2727, ext. 341.