Peer review: taking the mystery out of the new requirements.

• Author: McCrone, Linda

California joined more than 40 other states and territories, Jan. 1, 2010, in requiring mandatory peer review of firms that issue compilation, review, attest and audit reports through legislation sponsored by the California Board of Accountancy. Here's a primer on what that, means for affected firms.

Who is Subject to Peer Review?

The first step is to determine whether the firm is issuing financial statements or a trial balance. If the firm is not issuing a financial statement, then it's not required to issue a report and would not be subject to peer review.

For more, see SSARS standards, specifically the related interpretations of Sec. AR 100, question 15 (AR Sec. 9100.54)

If the firm is issuing financial statements, but only for management use of the client and not for third parties--such as a bank--SSARS Sec. AR 100.24 allows the firm to issue financial statements without a report.

To do so, there must be an engagement letter with the client with very specific wording, and each page of the financial statements must include a reference such as "restricted for management's use only."

More details and a sample engagement letter are available in the standards.

A firm that produces financial statements for management use only can turn these statements over to another CPA firm to issue a compilation, review or audit. Under the related interpretations of Sec. AR 100, question 31 (AR Sec. 9100.136), although the other firm is a third party, it's not deemed to be using the financial statements.

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Although question 31 and the related answer address a situation where the other CPA firm is performing an audit, the question and answer also applies to compilation and review engagements.

Accountancy Regulations, Article 6, sec. 42 excludes firms from peer review whose highest level of work is compilations where no report is issued.

CPA firms with employees acting as controllers or similar positions for clients shouldn't be issuing reports if they are part of the management of the client. Instead, they could issue a transmittal letter on the client's letterhead. See the related interpretations of Sec. AR 100, question 21 (AR Sec. 9100.80) for sample language. This type of engagement would not be subject to peer review.

When Does Peer Review Apply?

Firms will begin reporting peer review information to the CBA in summer 2011, even though the law is effective Jan. 1, 2010.

Accountancy Regulation Article 6, Sec. 45 has a three-year phase-in using the last two digits of a firm number (the firm number is the individual's license number for sole practitioners who are not incorporated):

* Firm numbers ending in 01-33: reporting date is no later than July 1, 2011

* Firm numbers ending in 34-66, reporting date is no later than July 1, 2012

* Firm numbers ending in 67-00, reporting date is no later than July 1, 2013

Under the CBA's regulations, a firm operating or maintaining an accounting and auditing practice shall have a peer review report accepted by a peer review program within 36 months prior to its license renewal date and have a peer review report accepted once every three years.

The CBA determines who will be subject to mandatory peer review. Since the statute went into effect Jan. 1, 2010, the CBA could determine that a firm issuing any compilation, review, audit or attest engagements with report dates alter Jan. 1, 2010, is operating an accounting or auditing practice.

What is Peer Review?

A peer review, performed every three years by an independent CPA, comes in two types:

* System Reviews: for firms that perform audits or examinations of prospective financial statements under the Statements on Standards for Attestation Engagements (SSAEs)

* Engagement Reviews: for firms that only issue compilations, reviews and reports under the SSAEs that are not included in system reviews.

For engagement reviews, the peer...