Make sure you tell your peer reviewer about all the audits you do or things could get ugly – peer review update part 2
Previous post explained that hundreds of peer review reports are in the process of being withdrawn because the firms did not tell their reviewer that the firm performs pension audits. As a result, the review did not cover any of those engagements.
Make sure you tell your peer reviewer about all the audits you perform. Things can get real bad real fast if you don’t.
What are the next steps?
The administering entities will confirm information provided by the Department of Labor with the peer reviewer and the reviewed firm. Assuming information is verified, the administering entity will withdraw the acceptance letter. The reviewer may withdraw his or her report.
It is my understanding that some reports have already been withdrawn. Firms are now going through the process of getting the replacement reviews.
They may or may not be able to use their current reviewer.
Impact on the replacement review
This is where independence rules make things complicated. In order to be a reviewer, a CPA must not have been involved in the quality control system in the year of the review or the prior year. Depending on when the replacement review is performed, there’s a good chance the previous reviewer will not be independent and therefore cannot provide the new review.
In that in-between year, many reviewers will provide an inspection to the firm. That means the reviewer is not independent for that year and the following year. That means the replacement review can’t be performed by the same reviewer.
A reviewer must have experience that matches the audits in the review. If the current reviewer doesn’t do some pension audits, another firm will be needed or the reviewer will have to retain another reviewer to look at the pension audits.
Guidance of the AICPA Peer Review Board is that the issue of not including pension audits in the list of engagements provided to the reviewer is a Memorandum for Further Consideration issue (abbreviated MFC – sorry, I can’t completely avoid the technical words). This is the basic building block of issues identified in a peer review. The reviewer will then need to consider the systemic cause.
The MFC could get elevated to one of three levels for disposition. Best case is an unintentional omission which is addressed in a Finding for Further Consideration (called an FFC), which would result in a written comment on the FFC to the firm to correct the action and a response on the FFC from the firm explaining what they are going to do. That would likely be the end of the issue.
The MFC could also be assessed is a deficiency or a significant deficiency by the reviewer. If a deficiency, the peer review report would be pass with deficiency. If a significant deficiency, the report would be fail.
In either case, the reviewed firm will be preparing a written letter of reply. There would be a corrective action coming down from the state Peer Review Committee.
Consider the impact on your insurance rate and client decisions from you disclosing a less-than-perfect report.
Next post: cascading consequences of your peer review report going away