The new measure: the new 2005 peer review requirements are here.

Organizations must redefine themselves constantly to remain successful, always assessing product development and obsolescence, customer comments and the general business environment.

The same premise applies to the AICPA Peer Review Program. The AICPA Peer Review Board must continually assess the effects of new accounting and auditing pronouncements, increased regulation, and comments from reviewers, reviewed firms and third-party users of peer review reports on the peer review process itself. To make peer review reports more descriptive, increase third-party acceptance and involve reviewed firms more in the process, major changes have been made to the AICPA peer review standards, effective Jan. 1, 2005.

SOME HISTORY

The board began a detailed re-evaluation of the program in 1998 to ensure that it continued to enhance the quality of accounting and auditing work performed, and to emphasize the importance of protecting the public interest. Phase I of this process, effective Jan. 1, 2001, established a three-tiered approach to peer reviews: system, engagement, and report peer reviews.

Phase II included, among other things, researching and analyzing the comments received from regulators and other users of peer review reports. After evaluating responses to its May 2003 exposure draft, which proposed certain changes to the program, the results were finalized and incorporated into the standards.

These revised standards are posted on the AICPA's website, www.aicpa.org/members/div/practmon/2005_stds_notes.htm. The most obvious changes to the standards involve the transparency of the peer review reports and the requirement for firms to provide peer reviewers with written representation letters.

TRANSPARENCY

While the reviewed firm is the primary user of a peer review report, other users include regulatory bodies, such as the U.S. Department of Labor and General Accounting Office; the general public; and in some states, the state board of accountancy. See www.calcpa.org/peerreview for California firm requirements.

To help achieve enhanced transparency for all users, the following significant changes were introduced for system and engagement peer reviews:

* All peer review reports will refer to the letter of comments if a letter of comments is issued.

* If a peer review report expresses an adverse opinion, all deficiencies and related recommendations will be contained in the report and no letter of comments will be issued.

* If a peer review report expresses a modified opinion, the deficiencies and related recommendations resulting in the modified opinion will be included in the report. A letter of comments could also be prepared to present the comments and recommendations that did not result in the modified opinion.

* System peer reviews will specifically identify engagements required to be selected by the Peer Review Board (normally ERISA and Yellow Book engagements) and identify the comments noted on these engagements in the report (if modified or adverse) and/or the letter of comments.

* A substandard engagement in a modified or adverse peer review report will be identified by industry and level of service.

For report reviews, deficiencies describing a substandard engagement will be identified and reported on under the caption "Significant Comments." Other deficiencies will be reported on under the caption "Comments."

FIRM REPRESENTATIONS

Firms are responsible for maintaining a system of quality control and complying with rules and regulations of state boards and other regulatory bodies. To emphasize this responsibility, all firms will be required to provide a representation letter to their peer reviewers. (See the end of this article for a sample representation letter).

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For system reviews, the representations should be dated the same date as the peer review report. For engagement and report reviews, the representations should be dated the same date that the firm submits the list of engagements to the reviewer. The representation letter should be signed by those members of management whom the team captain/reviewer believes are responsible for and knowledgeable about the matters covered in the representations, the firm and its system of quality control. Normally, the managing partner and the quality control partner will be the appropriate parties to sign the representation letter.

PERFORMANCE OF SYSTEM REVIEWS

In addition to the transparency and representation letter changes, other changes affecting the performance of the peer review include:

* Reviewers can provide a partial list of the engagements selected for review up to two weeks in advance of field work, since firms may need time to assemble required documentation and personnel before the review team arrives. The complete list, which will include at least one "surprise" engagement (normally from the highest level of service), can only be provided upon commencement of the review.

* Team captains are now required to be present for the exit conference (unless the review is being performed off-site under the Interpretation I guidelines). Thus, firms must ensure all pertinent staff are available or the exit conference may have to be rescheduled at an added cost to the firm.

* System reviews at other than the firm's office (referred to as Interpretation I reviews) are only available to sole practitioners with no professional staff who perform three or fewer engagements (defined as engagements under the SASs, Government Auditing Standards or examinations of prospective financial statements under the SSAEs) that require a system peer review to be performed.

INCREASE IN LEVEL OF SERVICE

If a firm that had an engagement or report peer review undertakes an engagement (defined as engagements under the SASs, Government Auditing Standards or examinations of prospective financial statements under the SSAEs) that would require a system peer review, they must immediately notify the peer review office and undergo a system review. The system review would be due within 18 months from the year-end of the engagement that triggered the system review or by the firm's next scheduled due date, whichever is earlier.

CONCLUSION

A summary of the significant changes to the program standards can be found at www.calcpa.org/peerreview, where you can also find a copy of a letter CalCPA recently sent to firms noting major changes to ethics, accounting and auditing standards that will impact your peer review.

To the Team Captain/Reviewer

We are providing this letter in connection with the peer review of {name of firm} as of the date of this letter and for the year ended June 30, 20xx.

We understand that we are responsible for complying with the rules and regulations of state boards of accountancy and other regulators. We confirm, to the best of our knowledge and belief, that we are not aware of any situations where {name of firm} or its personnel has not complied with state board(s) of accountancy or other regulatory bodies rules and regulations, including applicable firm and individual licensing requirements in each state in which it practices for the year under review or has notified the peer reviewer of any such situations. We have also provided a list of all client engagements to the {reviewer/administering entity} with periods ending during the year under review and have provided the reviewer with any other information requested, including communications relating to allegations or investigations (including litigation) in the conduct of an accounting, audit or attestation engagement performed and reported on by the firm, whether the matter relates to the firm or its professional personnel, within three years preceding the current peer review year-end. For attestation engagements, including financial forecasts or projections, the list included those engagements with report dates during the year under review.

Sincerely,

{Name of reviewed firm}

BY AL CLAVELLI, CPA & LINDA MCCRONE, CPA

Al Clavelli, CPA is a technical reviewer in CalCPA's technical services department. You can reach him at [e-mail]. Linda McCrone, CPA is director of CalCPA's technical services department. You can reach her at [e-mail].