From those whose firms have recently gone through a peer review as part of the AICPA’s Peer Review Program (PRP), the feedback is consistent. Things have changed. While the underlying requirements of the PRP are the same, a review of a sample of an accounting firm’s engagement workpapers in order to assure compliance with applicable professional standards, the scrutiny with which these reviews are being performed is undeniably higher that what many firms are accustomed to, based on their prior experience.
So, what is driving this increased scrutiny in the peer review process? Ultimately, this renewed focus on the quality of accountant’s work is being driven by a perception that the quality of work performed by public accounting firms is not meeting the professional standards. Specifically, the 2015 Department of Labor (DOL) review on the audits of employee benefit plans (EBPs) revealed a high level of non-conformity with both AICPA auditing and ERISA reporting standards, particularly among firms performing few EBP audits. This, along with other numerical and anecdotal evidence that engagement quality is not up to par, have led the American Institute of Certified Public Accountants (AICPA) to institute its Enhancing Audit Quality (EAQ) initiative. Included in the EAQ is increased emphasis on the peer review program as a primary vehicle to identify deficient engagements and to drive compliance with professional standards, and thereby audit quality.
So, what do the numbers say? In 2014, the first year of the EAQ initiative, the increased oversight of the peer review process found that 43% of engagements reviewed were non-conforming with professional standards. Worse, the peer-review process was not doing a good job of identifying this non-compliance. Specifically, in 2014, the peer review process only identified 22% of these non-compliant engagement. As a result of the increased oversight of the peer-review program, as well as other initiatives of the EAQ, such as improved training and documentation tools, the detection rate of deficient engagements identified by the peer review process has risen up to 68%. While a significant improvement, clearly there is still work to be done.
So, what are the 2019 areas of focus for the EAQ? The AICPA has listed the following as the areas of focus for 2019:
- Risk assessment and its documentation
- Auditing estimates
- Internal controls
- SOC Reporting
Not surprising, these are areas where prior peer reviews have identified high rates of non-conformity among reviewed firms. Specifically, recent peer review results indicated that more than 47% of audit firms are not in compliance with AU-C Section 315 and 330, the applicable sections of the audit guidance which deals with performing a risk assessment and linking it to the scope of the audit procedures performed. High rates of non-compliance with professional standards also exist with regard to auditing accounting estimates, which have increasing significance with the effective date of Topic 606 related to revenue recognition. Also, high rates of non-compliance exist related to the auditor’s responsibility to obtain an understanding of an entity’s internal control environment, which is necessary to adequately plan the audit and also in effectively responding to SOC 1 reports. Collectively, these areas of focus represent the underlying foundation of the audit planning process, which, if not performed effectively, jeopardize the ability of the firm to perform an audit, or either professional service, in accordance with professional standards.
So, what should you be doing? With its focus on the hallmarks of effective audit planning, the EAQ, and thereby the peer review process, is taking a “back to basics” approach to assure that firms are doing the activities that lead to audit quality. It is essential that accounting firms take the same “back to basics“ approach. To ensure its adherence to compliance with professional standards, and thereby engagement quality, accounting firms should do the following:
- Review their engagement methodologies for conformity with professional standards
- Adequately document their procedures, particularly the linkage of the risk assessment to the nature, timing and extend of procedures performed
- Allow for adequate and timely review of this documentation by more experienced engagement team members
- Conform to all professional standards, especially those related to reporting
- Stay up to date on both new professional standards as well as on guidance on how best to apply existing guidance, such as recently issued guidance on EBP audits and recent changes to the auditor’s report
- Use the peer review process as a way to enhance engagement quality, rather than simply a compliance activity
While moving in the right direction, there is clearly more work to be done in order to more effectively move the needle on audit quality. Surgent CPE is here to help. We offer a series of training courses on topics related to auditing and accounting services professional standards, including our annual A&A Update course (ACAU), a deep dive into the SSARS (CRAU) and specific courses on topics such as performing an effective risk assessment (RAA4) and GAAS compliant audit (GAAS).
Enhancing audit quality is the responsibility of everyone in the profession. Working together, and utilizing all available resources, the auditing profession can achieve the high level of quality for which it has traditionally been noted for and which the investing public expects.
Rich Daisley, CPA, is Senior Director, Accounting and Financial Reporting Content for Surgent CPE. With over 26 years of experience in the accounting and auditing field, Mr. Daisley has worked in both the client service setting, mainly for PwC’s Capital Markets and Accounting Advisory Services Group and for PECO Energy’s Merger and Acquisition Group, and in the internal capacity setting as a course developer and facilitator creating leading training courses for PwC and Surgent. Rich lives in suburban Philadelphia.