PROPOSED RULEMAKING
STATE BOARD OF ACCOUNTANCY
[49 PA. CODE CH. 11]
Peer Review
[29 Pa.B. 4448] The State Board of Accountancy (Board) proposes to add §§ 11.81--11.86 (relating to peer review) to read as set forth in Annex A.
Background and Statutory Authority
Section 8.9 of The CPA Law (63 P. S. § 9.8i), which was added by the act of December 4, 1996 (P. L. 851, No. 140) (Act 140), requires licensed public accounting firms, defined to include sole practitioners, that perform audit or review engagements to undergo a peer review as a condition of license renewal or initial licensure (in the case of an out-of-State firm). Section 8.9 of The CPA Law also prescribes the frequency and scope of peer reviews, grounds for exemption from peer review, confidentiality of the peer review process and procedures for Board review of firms that fail to comply with peer review remedial action. Section 8.9(c) of The CPA Law empowers the Board to promulgate regulations that (1) approve peer review programs and standards; (2) establish qualifications of peer reviewers; and (3) prohibit unauthorized disclosure of information obtained during peer review. The Board's proposal would implement the provisions of section 8.9 of The CPA Law.
Description of Proposed Regulations
§ 11.81 (Definitions)
Section 11.81 would define the following terms used in the regulations: ''administering organization,'' ''firm'' and ''peer reviewer.''
§ 11.82 (Effective dates for peer review compliance; proof of compliance or exemption)
Section 11.82(a) would establish May 1, 2000, the start of the next biennial license period, as the deadline for peer review compliance by a firm that performs an audit engagement after May 1, 1998. Section 11.82(b) would establish May 1, 2004, as the deadline for peer review compliance by a firm that performs a review engagement but not an audit engagement after May 1, 1998. Section 8.9(g) of The CPA Law sets forth grounds for exemption from peer review compliance.
In establishing peer review compliance deadlines, the Board has attempted to reconcile what it perceives to be conflicting language on the subject in The CPA Law. Section 8.9(l)(2) of The CPA Law provides: ''This section [relating to peer review] shall not become applicable to firms and no firm shall be required to undergo a peer review under this section until May 1, 2000, except that this section shall not become applicable until May 1, 2004, to a firm that has not accepted or performed any audit engagements during the period May 1, 1998, through April 30, 2004.'' However, section 8.8(c) of The CPA Law (63 P. S. § 9.8h(c)), which relates to the licensing of firms, provides: ''An initial or renewal license shall not be issued to a firm after April 30, 2000 unless the firm complies with the requirements of Section 8.9 of this act.''
The Board believes the language of section 8.8(c) of The CPA Law is controlling. The Board has been advised by the prime sponsor of H. B. 1782, which was later enacted as Act 140, that the intent of the legislation was to require peer review compliance for nonexempt firms performing audit engagements and those performing review engagements by May 1, 2000, and May 1, 2004, respectively. This interpretation is consistent with the position of the Pennsylvania Institute of Certified Public Accountants (PICPA), which spurred the introduction of H. B. 1782. Moreover, the deadlines for compliance have been well publicized by the PICPA since the enactment of Act 140, and were reiterated by the Board in its Winter 1998/99 Newsletter. Owing to the wide dissemination of the deadlines, as well as the large number of firms that currently participate in voluntary peer review programs, the Board believes that the majority of nonexempt firms that would be subject to the compliance deadline of May 1, 2000, either have already completed a peer review or have made arrangements to timely complete a peer review. For those nonexempt firms that, for good cause, are unable to complete a peer review by the May 1, 2000, deadline, the Board is prepared to grant extensions of up to 12 months as authorized by section 8.9(g)(3) of The CPA Law.
In accordance with section 8.9(a) of The CPA Law, § 11.82(c) would require that a nonexempt firm submit with its application for initial licensure or license renewal a letter from a peer review administering organization evidencing the firm's completion of a peer review.
Section 11.82(d) would require that a firm claiming an exemption from peer review submit with its application for initial licensure or license renewal information that substantiates its entitlement to an exemption under section 8.9(g) of The CPA Law. In the case of a multistate firm that claims an exemption under section 8.9(g)(1) of The CPA Law based on its having completed a peer review in another state or jurisdiction, the firm would have to submit the following: (1) a letter from the out-of-State peer review administering organization evidencing the firm's completion of a peer review (within 3 years of the date of the application) that satisfies Pennsylvania requirements; and (2) a statement that the firm's internal inspection or monitoring procedures require the firm's personnel from an out-of-State office to perform an inspection of the firm's Pennsylvania offices at least once every 3 years. This latter requirement, which is complementary of peer review goals, provides additional protection to users of attest services in this Commonwealth by ensuring that Commonwealth offices of multistate firms that elect not to complete an in-State peer review are nevertheless required to undergo periodic internal inspections for adherence to quality control procedures.
§ 11.83 (Administering organizations for peer review; firm sponsorship not required)
Section 11.83(a) would deem the following organizations approved to administer a peer review program: (1) the Securities and Exchange Commission Practice Section and the Private Companies Practice Section of the American Institute of Certified Public Accountants; and (2) any State society or institute that participates in the AICPA Peer Review Program. Because the AICPA Peer Review Program is widely recognized in the public accounting profession as the preeminent model for peer review, and to avoid unnecessary costs and delays in implementing the peer review requirements, the Board is willing to grant deemed approval status to those professional accounting organizations that employ the AICPA peer review model.
Section 11.83(b) would clarify that a firm subject to peer review would not be required to become a member of the AICPA or any other administering organization.
§ 11.84 (Peer review standards)
Section 11.84 would require that a peer review conform to the AICPA's Standards of Performing and Reporting on Peer Reviews (AICPA Standards), together with any interpretations issued by the AICPA. Under Section 8.9(d) of The CPA Law, a nonexempt firm that performs an audit engagement must complete an onsite peer review, while a nonexempt firm that performs a review engagement must complete an offsite peer review. The AICPA Standards set forth detailed procedures for performing and reporting onsite and offsite peer reviews that are consistent with section 8.9(d) of The CPA Law.
§ 11.85 (Qualifications of peer reviewers)
Section 11.85(a) would provide that a peer reviewer, except as provided in subsections (b) and (c), would have to possess the qualifications set forth in the AICPA Standards. Those standards require a peer reviewer (1) to be currently licensed to practice as a certified public accountant; (2) to possess current knowledge of applicable professional standards, including knowledge of current rules and regulations applicable to the industries for which engagements are reviewed; (3) to have at least 5 years' recent experience in the practice of public accounting in the accounting or auditing function, including experience in the industries for which engagements are reviewed; (4) to be currently active at the supervisory level in the accounting or auditing function of a firm that is enrolled in a peer review program; and (5) to have the competency and training to conduct a peer review. A peer reviewer who serves as captain of an onsite peer review team must also receive additional peer review training and be the owner of a firm that has received an unqualified report on the system of quality control of its accounting and auditing practice for its most recently completed peer review.
Section 11.85(b) would permit a licensed public accountant who otherwise satisfies the AICPA Standards to serve as a peer reviewer. Section 11.85(c) would permit a sole practitioner with a public accounting or auditing practice who otherwise satisfies the AICPA Standards to serve as a peer reviewer, provided the practitioner is also enrolled in a peer review program. The AICPA Standards do not reference public accountants or sole practitioners (whether public accountants or certified public accountants); however, the Board sees no reason why the individuals could not serve as peer reviewers so long as they have the requisite experience and training.
Consistent with section 8.9(c)(2) of The CPA Law, § 11.85(d) would require that a peer reviewer be independent from, and have no conflict of interest with, the firm being reviewed.
§ 11.86 (Confidentiality of peer review reports)
Section 11.86(a) would provide that except as authorized under section 8.9(e) and 8.9(h)(3) of The CPA Law, a peer review report and related information are confidential. Section 8.9(e) of The CPA Law permits a firm to waive confidentiality in proceedings before the Board to review the firm's noncompliance with remedial actions recommended by peer review. Section 8.9(h)(3) of The CPA Law provides that nonprivileged material includes information considered during peer review that is otherwise available to the public; information presented or considered in the peer review process that was not prepared in connection with peer review; and any administrative proceeding or related civil action brought to enforce section 8.9 of The CPA Law.
Section 11.86(b) would authorize the Board to inquire of an administering organization whether a peer review report has been accepted.
Fiscal Impact and Paperwork Requirements
The proposed regulations would have a fiscal impact on licensed public accounting firms subject to peer review. The Board cannot accurately estimate the cost of completing a peer review. The scope, and thus cost, of a peer review may vary widely depending on the size of the firm and the nature of the attest engagements that are being reviewed. The cost could range from less than $1,000 for an offsite review to hundreds of thousands of dollars and more for an onsite review of the Nation's largest firms.
The proposed regulations would cause the Board to incur minor costs in processing license renewal applications and initial license applications of firms subject to peer review. The Board anticipates that these costs will be defrayed by application and renewal fees.
The proposed regulations would require firms subject to peer review to provide the Board with proof of completion of a peer review or information substantiating entitlement to an exemption. The proposed regulations also would require the Board to revise its forms for initial licensure and license renewal. The proposed regulations would not impose new paperwork requirements on the Commonwealth's other agencies or its political subdivisions.
Compliance with Executive Order 1996-1
In accordance with Executive Order 1996-1 (relating to regulatory review and promulgation), the Board, in developing the proposed regulations, solicited comments from the major professional associations representing the public accounting profession in this Commonwealth.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on August 11, 1999, the Board submitted copies of this notice of proposed rulemaking to the Independent Regulatory Review Commission (IRRC), the Senate Standing Committee on Consumer Protection and Professional Licensure and the House Standing Committee on Professional Licensure. The Board also provided IRRC and the Committees with copies of a regulatory analysis form prepared in compliance with Executive Order 1996-1. Copies of this form are available to the public upon request.
If IRRC has objections to any portion of the proposed regulations, it will notify the Board within 10 days following the close of the Committees' review period, specifying the regulatory review criteria that have not been met. The Regulatory Review Act sets forth procedures that permit IRRC, the General Assembly and the Governor to review objections prior to final adoption of the regulations.
Public Comment
The Board invites interested persons to submit written comments, suggestion or objections regarding the proposed regulations to Steven Wennberg, Esq., Counsel, State Board of Accountancy, P. O. Box 2649, Harrisburg, PA 17105-2649, within 30 days following publication of this notice of proposed rulemaking in the Pennsylvania Bulletin.
THOMAS J. BAUMGARTNER, CPA,
ChairpersonFiscal Note: 16A-556. No fiscal impact; (8) recommends adoption.
Annex A
TITLE 49. PROFESSIONAL AND VOCATIONAL STANDARDS
PART I. DEPARTMENT OF STATE
Subpart A. PROFESSIONAL AND OCCUPATIONAL AFFAIRS
CHAPTER 11. STATE BOARD OF ACCOUNTANCY
PEER REVIEW § 11.81. Definitions.
The following words and terms, when used in §§ 11.82--11.86 (relating to peer review), have the following meanings, unless the contract clearly indicates otherwise:
Administering organization--An entity that meets the standards specified by the Board for administering a peer review program.
Firm--A licensee who is a sole practitioner or a licensee that is a qualified association as defined in section 2 of the act (63 P. S. § 9.2).
Peer reviewer--An individual who conducts an onsite or offsite peer review. The term includes an individual who serves as captain of an onsite peer review team.
§ 11.82. Effective dates for peer review compliance; proof of compliance or exemption.
(a) Unless subject to an exemption under section 8.9(g) of the act (63 P. S. § 9.8i(g)), a firm that performs an audit engagement after May 1, 1998, shall complete a peer review before the license biennium that begins May 1, 2000.
(b) Unless subject to an exemption under section 8.9(g) of the act, a firm that performs a review engagement, but not an audit engagement, after May 1, 1998, shall complete a peer review before the license biennium that begins May 1, 2004.
(c) A nonexempt firm shall submit with its application for initial licensure or license renewal a letter from the peer review administering organization that evidences the firm's completion of a peer review.
(d) A firm claiming an exemption from peer review under section 8.9(g) of the act shall submit with its application for initial licensure or license renewal information that substantiates its entitlement to an exemption. In the case of a multistate firm that claims an exemption under section 8.9(g) based on its having undergone a peer review in another state or jurisdiction, the firm shall provide the following:
(1) A letter from the out-of-State peer review administering organization evidencing the firm's completion of a peer review, within 3 years prior to the date of the application, that meets the requirements of the act and this chapter.
(2) A statement that the firm's internal inspection or monitoring procedures require that the firm's personnel from an out-of-State office perform an inspection of the firm's Pennsylvania offices at least once every 3 years.
§ 11.83. Administering organizations for peer review; firm membership not required.
(a) The following organizations are deemed qualified to administer peer review programs:
(1) The Securities and Exchange Commission Practice Section and the Private Companies Practice Section of the AICPA.
(2) Any State society or institute that participates in the AICPA Peer Review Program.
(b) A firm that is subject to peer review is not required to become a member of the AICPA or any other administering organization.
§ 11.84. Peer review standards.
A peer review shall be conducted in accordance with the ''Standards for Performing and Reporting on Peer Reviews,'' including interpretations thereof, issued by the AICPA.
§ 11.85. Qualifications of peer reviewers.
(a) Except as provided in subsections (b) and (c), a peer reviewer shall possess the qualifications set forth in the ''Standards for Performing and Reporting on Peer Reviews,'' including interpretations thereof, issued by the AICPA.
(b) A licensed public accountant who otherwise satisfies the requirements of subsection (a) shall be qualified to serve as a peer reviewer.
(c) A sole practitioner with a public accounting or auditing practice who otherwise satisfies the requirements of subsection (a) shall be qualified to serve as a peer reviewer if the practitioner is also enrolled in a peer review program.
(d) A peer reviewer shall be independent from, and have no conflict of interest with, the firm being reviewed.
§ 11.86. Confidentiality of peer review reports.
(a) All peer review reports and related information shall remain confidential except as provided in section 8.9(e) and (h)(3) of the act (63 P. S. § 9.8i(e) and (h)(3)) and subsection (b) of this section.
(b) The Board will have the right to inquire of an administering organization whether a peer review report has been accepted.
[Pa.B. Doc. No. 99-1372. Filed for public inspection August 20, 1999, 9:00 a.m.]
No part of the information on this site may be reproduced for profit or sold for profit.This material has been drawn directly from the official Pennsylvania Bulletin full text database. Due to the limitations of HTML or differences in display capabilities of different browsers, this version may differ slightly from the official printed version.
