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AICPA looks at ways to lower review costs.

Even as the quality review program completes its first three-year cycle, with firms reviewed in the 1989 pilot year receiving their second reviews in 1992, the AICPA continues to focus its attention on member concerns--particularly the cost of quality reviews.

During the past three years, more than 13,000 quality reviews were completed, including 3,000 off-site reviews of firms that perform compilations and reviews but no audits. Of the reports issued to firms reviewed on site, 84% were unqualified and 14% were qualified; only 2% were adverse.

News well received

Eighty percent of the unqualified reports were accompanied by letters commenting on deficiencies in firms' practices and offering recommendations for improvement. These recommendations generally were well received by the reviewed firms, according to Elma Satterfield, a senior technical manager of the quality review division. Typical comments from practitioners read, in part, "I had doubts about the need for quality review, but it was not disruptive and the team captain helped us improve our system," and "Our firm was very impressed with the quality review program. We believe it will be a major force to improve the quality of services." A dart on solving a problem Quality review costs remain a problem for some small firms. In early 1992 the average total cost, including administrative fees and reviewers' expenses, of a quality review for a sole practitioner with no professional staff was approximately $1,800. For firms with 2 to 5 professionals, it was about $2,600, and for firms with 6 to 10 professionals, $3,600.

The AICPA is attempting to find ways to lower these costs. It already has taken one major step in this direction. In August of this year, the quality review executive committee amended interpretation no. 1 of the Standards for Performing and Reporting on Quality Reviews to allow sole practitioners with up to 4 professional staff (5 professionals in all) to have on-site reviews conducted at locations other than the reviewed firm's office. The amendment also eliminated the requirement for a personal meeting between the reviewer and sole practitioner.

In effect, the amendment means sole practitioners can now have their on-site reviews conducted entirely by mail and telephone, which can significantly reduce quality review ,costs.

What practitioners can do

Practitioners can also take steps to reduce their own quality review costs. They should keep in mind that, since reviewers are paid by the hour, the key to reducing costs is to reduce hours. The following are some guidelines for members' use in controlling costs.

* Don't overestimate accounting and auditing hours. If a firm's estimate of accounting and auditing hours is too high, the reviewer's budget will be too high. The most common cause of overestimates is the inclusion of time spent by non-professionals on compilations.

When estimating the hours for monthly or quarterly compilations, include only the time it actually took to prepare and review the financial statements. Do not include "bookkeeping" time, such as time spent assigning a general ledger classification, or inputting each cash disbursement or receipt, summanzing all of the transactions of the same general ledger classification or preparing a trial balance.

* Be ready and plan ahead. When the reviewer arrives, everything needed should be at hand. If you believe an engagement is likely to be reviewed, the workpapers should be pulled and the engagement staff should be available to answer questions. If there are problems on an engagement, the reviewer should be informed at the outset to avoid having him or her waste time looking for material that you know is not there.

* Cooperate with the reviewer. You may not agree with everything, but arguing with the reviewer over every point is a waste of time. The reviewers will describe findings on matters for further consideration on forms which they will give to the firm for comments. Don't just answer yes or no. Review hours are reduced when forms are completed with full explanations and returned to the reviewer as soon as possible. If you don't agree with the reviewer, explain why you disagree. If you do agree, explain why you believe the problem occurred.

* Consider a firm-on-firm review. Reviewers selected by AICPA and state society committees bill firms at set hourly rates. You may be able to reduce review costs by contracting with another CPA firm to perform the review at a fixed fee.

* Perform reviews of other firms. If your firm has received an unqualified report on its most recent peer or quality review, perform reviews of other firms. You must have a review every third year. Therefore, a good way to reduce your review costs is to perform one review at least every third year.
COPYRIGHT 1992 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Publication:Journal of Accountancy
Date:Dec 1, 1992
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