Some preliminary thoughts on the Enhancing Audit Quality initiative and some Peer Review implications
The AICPA has launched an initiative they are calling Enhancing Audit Quality, or EAQ. This will be a coordinated effort to improve the overall quality of audits.
Why the initiative?
There are some serious quality issues. More on that momentarily.
This will be the first in a long series of articles on the EAQ initiative. I think this will be a big deal over the next few years and we probably ought to start paying attention.
Today I listened to a one-hour webcast. You can find the link here, and since it was not for credit, I’m guessing you may soon be able to watch it on your own.
Why is there a perceived quality issue?
In the last year, the AICPA has found out a few things which were mentioned in the webcast:
- Some firms performing audits are not enrolled in a practice monitoring program. That means they’re not going through a peer review.
- Some firms are going through an engagement review even though they perform audits. This means the reviewers are only looking at compilations and reviews. Audits aren’t getting any attention.
- Some firms are not telling a peer reviewer that they perform must-select engagements. This means that pension or single audit engagements are not included in the review. The speaker in the webcast indicated the AICPA has found a “disturbing number of firms” who are excluding must-select engagements from their review.
The Department of Labor, working with the AICPA, has identified a large number of firms who perform pension audits but aren’t having those engagements included in their peer review. This is resulting in a lot of peer review report being recalled. I have discussed this previously in a series of posts. This is a big deal.
The webcast had comments that the AICPA is working on a method to match firms who perform must-select engagements with the peer review records to identify firms who are not reporting must-select engagements.
Think of the implications. That means the AICPA thinks there is a larger pool of firms not reporting must-selects than are already known. Down the road there will be more peer review reports that get withdrawn. This is a really big deal.
Comments in the webcast and the EAQ discussion paper imply there are a number of peer reviewers who are not doing a good job. It is my perception that is in fact the case. I’ll have more to say on that in a later post.
All of that is pointing towards the existence of a fairly serious quality issue in our profession. I suggest we should do a lot of cleanup by ourselves before someone else starts cleaning up for us.
Just a few possible future steps
Here are just a few random comments from the webcast to get a general feel for some of the things that are possible down the road.
The AICPA may start a special team of peer reviewers that will randomly select engagements for an independent review after the reviewer has finished his or her work but before the report is issued. This will accomplish several things. It will be a very timely quality-control check of the work performed by the reviewer, a double-check on the quality of work performed by the firm, and it will give faster feedback to the national peer review committee on what is going on in the field.
The peer review program might add a requirement that if a firm performs a must-select engagement for the first time, the engagement will have to be reviewed before the next scheduled peer review cycle. Basically you may be hiring a reviewer to look at your must-select engagements shortly after you finish the work.
The peer review program might add a requirement that a firm having serious problems with a must-select or high-risk engagements will need to have a pre-or post issuance review of any future engagements in that industry.
Results from the peer review program are identifying patterns of where issues are developing in engagements. The AICPA will be looking across audit standards, continuing education classes, quality control standards, ethics rules, and peer review performance requirements to see what possible changes could be made to correct patterns of errors.
Peer reviewers will be required to take a “deep dive” into specified issues during each peer review cycle. In 2014, reviewers will be taking a closer look at independence in regards to non-attest services performed during the engagement.
More to come
As you can already tell, I think there is a significant quality issue in our profession and this EAQ initiative is a big deal. I’ll have lots more comments as time allows.