The latest from peer review
Maintaining purpose, new standards and common trends
Tina Nordquist | December/January 2025 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 2024 peer review cycle.
What exactly is a peer review?
Based on my interactions with accounting 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 Statements on Auditing Standards (SASs), Statements on Standards for Accounting and Review Services (SSARS) or services under the Statements on Standards for Attestation Engagements (SSAEs) 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 helping practitioners share insights about the interpretation and application of professional standards.
Peer reviews are categorized into one of two types:
- System reviews: Firms that perform engagements under SASs or Government Auditing Standards (GAS), examinations under SSAEs or engagements under PCAOB standards as their highest level of service must have system reviews. A system review assesses whether a firm’s system of quality control for its assurance practice is both properly designed and operating effectively. In addition to assessing whether engagements performed by the firm adhere to the underlying professional standards, a system review also looks at the firm’s leadership, human resources, relevant ethical requirements, engagement acceptance/continuance and monitoring functions. The reviewer will read the firm’s quality control policies and procedures to verify that they are designed in compliance with quality control standards. Based on the reviewer’s assessment of risk relative to the review, the reviewer will conduct procedures such as interviews with staff/owners, tests of CPE and licensing, reviews of acceptance/continuance procedures, along with verifying that the firm is properly vetting new staff and performing staff evaluations to ensure that the firm’s system is operating as designed.
- Engagement reviews: Firms that only perform services under SSARS or SSAEs other than examinations may elect to undergo engagement reviews. During this process the peer reviewer assesses whether selections of engagements were performed and reported on in conformity with relevant professional standards. The reviewer also verifies that the firm and practitioner possessed the appropriate state licenses.
Completed peer review packages for both types of review are submitted by the reviewer to the firm’s AE, which could be either the relevant state society or the AICPA National Peer Review Committee. The MNCPA is the AE for firms whose primary operations are within Minnesota and North Dakota. The peer review package is inspected by a technical reviewer at the AE before being submitted to the AE’s report acceptance body (RAB) for final approval or adjudication.
Looking back at 2023 and 2024
During the 2024 peer review cycle, which spanned Sept. 1, 2023, through Aug. 31, 2024, 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, in 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 |
| 2024 |
41 (87%) |
5 (11%) |
1 (2%) |
47 |
| 2023 |
65 (84%) |
10 (13%) |
2 (3%) |
77 |
| 2022 |
66 (85%) |
10 (13%) |
2 (2%) |
78 |
Key deficiencies noted by reviewers during the period included:
- Reports did not conform to standards, including failure to properly modify reports for major GAAP departures.*
- Incorrect financial statement presentation, including missing disclosures.*
- Financial statements did not conform to industry specific standards for a not-for-profit entity.
- Failure to document expectations for analytical procedures on a review engagement.*
- Failure to consider/implement new standards (ASC 606 and ASC 842).
*Indicates a recurring deficiency from the 2022-23 review cycle.
Systems reviews results
Review year
(Sept.-Aug.) |
Pass |
Pass with
deficiencies |
Fail |
Total |
| 2024 |
50 (87%) |
6 (11%) |
2 (2%) |
58 |
| 2023 |
39 (91%) |
3 (7%) |
1 (1%) |
43 |
| 2022 |
62 (90%) |
6 (9%) |
1 (1%) |
69 |
For simplicity, “pass with deficiencies” reports and “fail” reports are combined into a non-pass category. This year we noted that the rate of non-pass reports was approximately double that of the prior year but was in line with the results of 2022.
Key deficiencies noted by reviewers during the period included:
- Engagements not documented or performed in accordance with professional standards.*
- New accounting and auditing standards were not properly implemented (changes in audit report, NFP industry-specific disclosures, GASB 67, ASC 842).
- Risk assessment not performed/documented in accordance with standards.*
- Ineffective monitoring procedures or no documentation of monitoring procedures.*
- Financial statement preparation not identified as a significant threat as required by Yellow Book.
- Inadequate disclosures under ASC 606.
- Audit reports did not include all applicable opinion units.
*Indicates a recurring deficiency from the 2022-23 review cycle.
Breaking down peer review trends
The incidence of pass reports is currently at the highest point since 2016, while non-pass reports are at their lowest point. Taken as a 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 your team is not only earning the required number of total credits required for licensure, but that the CPE covers new standards as well as industry specific content that is tailored for your client base.
Develop a plan to address the new quality management standard. Compliance with SQMS No. 1 is required on Dec. 15, 2025. The AICPA Quality Management website contains a number of useful resources, including the AICPA’s Example Risk Assessment Template.
Stay current with respect to the adoption of new standards and make sure you remain well-versed as to the application of existing standards.
Here are a few recently released and upcoming standards to brush up on:
- SAS No. 145: Provides clarification and enhancement of guidance related to risk assessments effective for periods ending on or after Dec. 15, 2023.
- SAS No 143: Enhances the existing standards related to auditing estimates. Effective for periods ending on or after Dec. 15, 2023.
- FASB ASC 326: Final adoption phase-in for periods beginning on or after Dec. 15, 2022, provides new guidance for measurement of credit losses.
- ASU 2023-09: Requires disclosure of additional disaggregated information regarding income taxes paid, as well as qualitative disclosures of the nature and effect of significant reconciling items. Adoption for public business entities is for periods beginning after Dec. 15, 2024, and Dec. 15, 2025, for all other entities.
The AICPA’s Center for Plain English Accounting is another great source of information and application guidance relative to the adoption of new standards.
Be ready and 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 new technologies, 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 2020-24, the number of Minnesota and North Dakota firms registered in the peer review program decreased by 141. In 2024 alone, 41 firms left the program while only seven new firms joined.
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.
Tina Nordquist, CPA is an audit partner with Brady, Martz & Associates, PC and oversees the firm’s Audit and Attest Department. Tina is the MNCPA Peer Review Committee chair and has been involved with the peer review committee for about a decade.
