The latest from peer review
Maintaining purpose, new standards and common trends
Sean Linton, CPA | December 2023/January 2024 Footnote
In the worlds of peer review and quality management, discussion has recently focused on the upcoming changes to the standards for firms’ quality control measures — and rightfully so. This sweeping overhaul of guidance, codified as Statement on Quality Management Standards (SQMS), takes effect at the end of 2025 and many firms are currently planning their adoption.
With that 2025 date in mind, let’s take a moment to examine the results of the 2023 peer review cycle.
What exactly is a peer review?
From my work teaching courses for the AICPA and interacting with audit professionals across the country, I’ve learned that the peer review process is often misunderstood. To address this misunderstanding, let’s first run through a few key points of the process.
Firms who provide services under attest standards are required to register with a peer review administering entity (AE) and undergo a peer review on a three-year rolling cycle. In addition to filling an important regulatory function, peer review also serves an important educational function by allowing practitioners to better understand matters of interpretation and application.
Peer reviews are categorized into one of two types based on the complexity of engagements performed and the overall profile of the reviewed firm:
- Engagement review: Firms that only perform services under Statements on Standards for Accounting and Review Services (SSARS) or services under the Statements on Standards for Attestation Engagements (SSAEs) other than examinations, may undergo engagement reviews, during which the peer reviewer is assessing whether a selection of engagements were performed and reported on in conformity with relevant professional standards.
- System review: Firms that perform engagements under Statements on Auditing Standards (SASs) or Government Auditing Standards, examinations under SSAEs, or engagements under PCAOB standards as their highest level of service must have system reviews. A system review includes reviewing a firm’s system of quality control for its assurance practice, and assessing whether engagements issued by the firm adhere to that system and the underlying guidance.
Completed peer review packages are then submitted by the reviewer to the firm’s AE, which would be either the relevant state society or the AICPA. The MNCPA is the AE for firms whose primary operations are within Minnesota and North Dakota. The peer review package is then inspected by a technical reviewer at the AE before being submitted to the AE’s report acceptance body for final approval or adjudication.
Looking back at 2023
During the 2023 peer review cycle, which spanned Sept. 1, 2022, through Aug. 31, 2023, the results are holding steady at a high degree of audit quality, but with room for improvement. The following sections present the results for engagement reviews and system reviews, respectively, over the past three years as well as a big picture summary of all types of peer reviews over the past several years.
| Engagement reviews results |
| Review year (Sept.-Aug.) |
Pass |
Pass with deficiencies |
Fail |
Total |
| 2023 |
65 (84%) |
10 (13%) |
2 (3%) |
78 |
| 2022 |
66 (85%) |
10 (13%) |
2 (2%) |
78 |
| 2021 |
60 (81%) |
9 (12%) |
5 (7%) |
74 |
Despite the slight increase in percentage of “fail” reports and the commensurate decrease in “pass” reports, the results have held steady compared to 2022 and continue to show improvement when compared to the 2021 cycle.
Key deficiencies noted by reviewers during the period included:
- Incorrect financial statement presentation and disclosure
- related to not-for-profit financials.
- Engagements performed without an engagement letter*.
- Failure to document analytical procedures and the relevant expectations*.
- ASC 606 — Lack of documentation and missing disclosures*.
- Missing disclosures*.
- Failure to include financial statements referred to in the auditor’s report*.
- Providing review services despite independence impairments.
- Accountant’s report missing key elements (e.g., the word “independent” within the title or body, management’s responsibilities, disclosures/effect of departures from financial reporting framework, etc.)
*indicates a recurring deficiency from the 2021-22 review cycle
| System reviews results |
| Review year (Sept.-Aug.) |
Pass |
Pass with deficiencies |
Fail |
Total |
| 2023 |
39 (91%) |
3 (7%) |
1 (1%) |
43 |
| 2022 |
62 (90%) |
6 (9%) |
1 (1%) |
69 |
| 2021 |
57 (88%) |
7 (11%) |
1 (1%) |
65 |
This year we continued to observe an increase in “pass” reports and an overall decrease in the number of reports that were other than “pass.” Additionally, the system review results continue to show notable improvement when compared to 2021.
Key deficiencies noted by reviewers during the period included:
- Insufficient review procedures which failed to catch errors related to missing
- documentation, report attachments, representation letters, etc.
- Personnel not obtaining appropriate CPE and/or knowledge to perform
- engagements*.
- Incorrect application of risk assessment procedures*.
- Ineffective monitoring procedures.
- Degradations of tone at the top (leaders not adhering to firm quality control
- requirements)*.
- Lack of critical documentation to support audit opinions*.
*indicates a recurring deficiency from the 2021-22 review cycle
Breaking down peer review trends
Looking back to 2016 in this final chart, system and engagement reviews are grouped together. For simplicity, “pass with deficiencies” reports and “fail” reports are combined into a non-pass category.
The incidence of “pass” reports is at the highest point since 2016, while non-pass reports are at their lowest point. Taken on the whole, the data are an indicator that Minnesota and North Dakota firms are on the right track and that the constant drive toward enhanced quality, accuracy and internal oversight is paying off.
How do we keep this trend going? Here are some next steps to consider:
- Make CPE compliance an intentional and methodical process. Ensure you and your team are earning CPE on the right topics throughout the year.
- Review your firm’s current quality control system. You’ll still need to squeeze a few more years out of your current quality management system, make sure it’s up to the task. Make sure your firm has a plan to fully adopt when the time comes. Remember that compliance with SQMS No. 1 is required on Dec. 15, 2025.
- Stay current and well-versed. It is imperative that we stay up to date on new guidance, standards and interpretations related to audit and assurance engagements.
- Here are a few recently released and upcoming standards to brush up on:
- SSAE 21 and 22:
- AT-C 105: Effective for audit reports dated on or after June 15, 2022, impacts across the attestation suite of services.
- AT-C 210: Effective for audit reports dated on or after June 15, 2022, impacts for review engagements.
- AT-C 205 and 206: Effective for audit reports dated on or after June 15, 2022, impact for assertion-based and direct examinations.
- SAS No. 145: Provides clarification and enhancement of guidance related to risk assessments effective for periods ending on or after Dec. 15, 2023.
- SEC Release 2023-139: Establishes enhanced disclosure requirements related to cybersecurity for public filers.
- FASB 326: Final adoption phase-in for periods beginningon or after Dec. 15, 2022, provides new guidance for measurement of credit losses.
- Be ready. Stay mindful of the rapid changes happening in the business landscape and their impact on audit procedures and documentation. Look to the MNCPA and AICPA for thought leadership on the effect of newctechnologies, methodologies and requirements within the audit profession.
The future of peer reviews
There is one data point worth mentioning that is not readily evident in the numbers presented above. From 2020 to 2023, the number of Minnesota and North Dakota firms registered in the peer review program decreased by 107 — in other words, 107 firms have shuttered their assurance practice since 2020. There has been much discussion about the declining numbers of new CPAs entering the profession, and this peer review decrease may be yet another signal of this overall decline.
Fewer firms providing audit and assurance work means that the firms who remain will need to broaden their service offerings to accommodate the steady demand for audit services.
More services, fewer firms, new clients and new standards mean even more reason to keep a close eye on important insights coming out of peer review.
Sean Linton, CPA, CITP is an audit partner with EisnerAmper. He specializes in Service Organization Controls (SOC) engagements for highly regulated clients in the Software-as-a- Service (SaaS) and government contracting industries. Sean is the MNCPA Peer Review Committee chair and has been involved with the peer review committee for six years.
