RULES AND REGULATIONS
Title 49--PROFESSIONAL AND VOCATIONAL STANDARDS
STATE BOARD OF ACCOUNTANCY
[49 PA. CODE CH. 11]
Peer Review
[30 Pa.B. 6194] The State Board of Accountancy (Board), by this order adds §§ 11.81--11.86 (relating to peer review) to read as set forth in Annex A.
Sections 11.81--11.86 implement the peer review requirements of 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). Specifically, the regulations clarify deadlines for peer review compliance and the requirements for peer review exemptions; establish qualifications for peer review administering organizations and peer reviewers; adopt peer review standards; provide for confidentiality of peer review reports; and define relevant terms.
Summary of Comments and Responses to Proposed Rulemaking
The Board published a notice of proposed rulemaking at 29 Pa.B. 4448 (August 21, 1999) following which the Board entertained public comment for 30 days. The Board received comments from the Pennsylvania Institute of Certified Public Accountants (PICPA), which supported the proposed regulations, and the Pennsylvania Society of Public Accountants (PSPA), which objected to parts of the proposed amendments.
The Board received comments from the House Professional Licensure Committee (House Committee) on October 6, 1999, and the Independent Regulatory Review Commission (IRRC) on October 22, 1999, as part of their review of the proposed regulations under the Regulatory Review Act (71 P. S. §§ 745.1--745.15). The Board did not receive comments from the Senate Committee on Consumer Protection and Professional Licensure (Senate Committee), which also reviewed the proposed amendments under the Regulatory Review Act.
Following is a summary of the comments that the Board received during proposed rulemaking and of the changes the Board has made to the regulations in response to the comments.
§ 11.81. (Definitions).
Section 11.81 defines terms used in the peer review regulations. At the suggestion of IRRC, the Board has added definitions for ''audit engagement,'' ''review engagement'' and ''sole practitioner.'' An audit engagement is an audit as defined in the Statement on Auditing Standards of the American Institute of Certified Public Accountants (AICPA); a review engagement is a review as defined in the AICPA's Statement of Standards on Accounting and Review Services (SSARS); and a sole practitioner is a licensed certified public accountant or licensed public accountant who practices public accounting on his own behalf. (AICPA and other acronyms used by the Board throughout Chapter 11 are defined in existing § 11.1 (relating to definitions).)
In addition, the Board has added definitions of ''onsite peer review'' and ''offsite peer review'' to § 11.81 to conform to recently approved changes in terminology in the AICPA's Standards for Performing and Reporting on Peer Reviews (AICPA Peer Review Standards). Section 8.9(d)(1) and (2) of the CPA Law (63 P. S. § 9.8i(d)(1) and (2)), provides that the peer review of a nonexempt public accounting firm that performs audit engagements shall be an ''onsite review,'' while the peer review of a nonexempt public accounting firm that performs review engagements shall be an ''offsite review.'' Section 8.9(d)(1) and (2) of the CPA Law also describes in general terms the scope of an onsite review and an offsite review; one of the differences between the two types of peer reviews is that an offsite review, unlike an onsite review, does not include a study of associated working papers. The terminology and descriptions used in section 8.9(d)(1) and (2) of the CPA Law are consistent with the current AICPA Peer Review Standards, which were also in effect when section 8.9 was added to the CPA Law in 1996. The Board's regulations adopt the AICPA Peer Review Standards. On October 5, 1999, the AICPA Peer Review Board approved revisions to the AICPA Peer Review Standards that will take effect January 1, 2001. The revised AICPA Peer Review Standards redesignate the terms onsite review and offsite review as ''system review'' and ''engagement review,'' respectively, and also enlarge the scope of the offsite, or engagement, review to include a study of associated working papers. To apprise firms how the revisions to the AICPA Peer Review Standards relate to the peer requirements of the CPA Law and to clarify that the revisions do not alter the requirements of the CPA Law, the Board has defined onsite peer review as a system review under the AICPA's Peer Review Standards and has defined offsite peer review as an engagement review under the AICPA's Peer Review Standards except for the study of associated working papers.
§ 11.82. (Effective dates for peer review compliance; proof of compliance or exemption).
Proposed § 11.82(a) provided that a nonexempt firm that performs an audit engagement after May 1, 1998, shall complete a peer review before the license biennium that begins May 1, 2000, while proposed § 11.82(b) provided that a nonexempt firm that performs a review engagement after May 1, 1998, shall complete a peer review before the license biennium that begins May 1, 2004. In its notice of proposed rulemaking, the Board noted that there appeared to be conflicting language in the CPA Law regarding the deadlines for peer review compliance. 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 engagement during 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.'' For reasons more fully discussed in the notice of proposed rulemaking, the Board considered section 8.8(c) of the CPA Law to be controlling.
The House Committee, IRRC and the PSPA raised objections to the proposed deadlines for peer review compliance. The House Committee commented that the Board had misapprehended the legislative intent regarding the effective dates for peer review and that the matter was clearly governed by section 8.9(l)(2) of the CPA Law. The House Committee stated that it ''finds the legislative intent was for May 1, 2000, to be the starting date for the peer review program, and not the deadline for peer review compliance.'' In accordance with the House Committee's comments, the Board has revised § 11.82(a) and (b) to provide that a nonexempt firm that performs an audit engagement after May 1, 1998, has until May 1, 2002, to complete a peer review, while a nonexempt firm that performs a review engagement after May 1, 1998, has until May 1, 2006, to complete a peer review.
The Board has also revised § 11.82(a) and (b) to clarify the type of peer review (onsite or offsite) that a nonexempt firm is required to complete.
The Board has made editorial changes to § 11.82(c), which provides that 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 peer review.
Proposed § 11.82(d) provided that a firm seeking to claim an exemption from peer review under section 8.9(g) of the CPA Law shall submit ''information that substantiates its entitlement to an exemption.'' Proposed § 11.82(d) further provided that 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 shall submit: (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 application) that satisfies Pennsylvania's 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 offices in this Commonwealth at last once every 3 years.
IRRC noted there is a conflict between section 8.9(a) of the CPA Law which provides that a firm is not required to undergo a peer review if it meets one of the exemptions in section 8.9(g), and section 8.9(g), which states that a firm shall be shall be exempt from the requirement of a peer review if all the specified conditions in paragraphs (1)--(3) apply. IRRC questioned the Board how it intends to resolve this statutory inconsistency. A cardinal rule of statutory construction, set forth in section 1922(1) of the Statutory Construction Act of 1972, 1 Pa.C.S. § 1922(1), provides that it may be presumed, in ascertaining the legislative intent of a statute, that the General Assembly did not intend a result that is absurd, impossible of execution or unreasonable. The three sets of conditions for exemption in section 9.8(g) of the CPA Law involve disparate, unrelated circumstances; it would appear exceedingly rare, if not impossible, for a firm to be able to satisfy all three sets of conditions at once. Accordingly, the Board believes the only reasonable interpretation of the CPA Law is to treat section 8.9(g) as setting forth three discrete exemptions, any one of which would permit a firm to be excused from the peer review requirement. Consistent with this interpretation, the Board has revised § 11.82(d) to explicitly state that a firm that has performed an audit or review engagement after May 1, 1998, is entitled to an exemption if any one of the three conditions in section 8.9(g) of the CPA Law apply.
The Board has also revised § 11.82(d) to set forth the types of documentation required to substantiate entitlement to each of the three exemptions. In addition to retaining the language in proposed § 11.82(d) about the required documentation for a multistate firm claiming an exemption under section 8.9(g)(1) of the CPA Law, the revised § 11.82(d) provides that a firm claiming an exemption under section 8.9(g)(2) of the CPA Law shall submit a notarized statement from the firm that: (i) the firm has not accepted or performed any audit or review engagement during the preceding 2 years; (ii) the firm does not intend to accept or perform any audit or review engagement during the next 2 years; and (iii) the firm agrees to notify the Board within 30 days of accepting an audit or review engagement and undergo a peer review within 18 months of commencing the engagement. The revised § 11.82(d) also provides that a firm claiming an exemption under section 8.9(g)(3) of the CPA Law shall submit one of the following: (i) a physician's statement that a specified medical condition prevents the firm from completing a timely peer review; (ii) a statement from the appropriate military authority that military service prevents the firm from completing a timely peer review; or (iii) a notarized statement from the firm setting forth exigent circumstances that prevent the firm from completing a timely peer review.
Finally, IRRC questioned whether § 11.82(d)'s requirement that a multistate firm claiming an exemption under section 8.9(g)(1) of the CPA Law demonstrate that its internal inspection or monitoring procedures require the firm's personnel from an out-of-State office to perform an inspection of the firm's offices in this Commonwealth every 3 years is equivalent to a peer review and, if so, how can such an inspection constitute an independent peer review required by the CPA Law. The internal inspection is complementary of, and not a substitution for, the statutory requirement that the multistate firm have completed a qualifying out-of-State peer review. The limitation of an out-of-State peer review of a multistate firm is that while the peer review team is able to evaluate a firm's quality control policies, it cannot offer assurances that the firm's offices in this Commonwealth are in compliance with those policies. The requirement that a multistate firm provide for a periodic internal inspection of its offices in this Commonwealth by its personnel from an out-of-State office furnishes an adequate level of assurance that the offices in this Commonwealth are in compliance with quality control policies.
§ 11.83. (Administering organizations for peer review; firm membership not required).
Proposed § 11.83(a) provided that the following organizations are deemed approved to administer a peer review program: (1) the AICPA's Securities and Exchange Practice Section and the Private Companies Practice Section; and (2) any State society or institute that participates in the AICPA Peer Review Program. Proposed § 11.83(b) provided that a firm that is subject to peer review will not be required to become a member of the AICPA or another administering organization.
IRRC asked the Board to explain the function of the administering organization in the peer review process. The administering organization ensures that all aspects of the peer review program are carried out. These functions include selecting qualified persons to serve on peer review teams, scheduling peer reviews, evaluating peer review reports, and recommending remedial or corrective action as needed.
Both IRRC and the PSPA recommended that the Board add provisions to permit organizations other than those proposed § 11.83(a) to qualify as administering organizations for peer review. IRRC further commented that the language in proposed § 11.83(a) appeared to limit multistate or National organizations, excepting AICPA, from being eligible for deemed approval status. IRRC also recommended that proposed § 11.83(b) be clarified to prohibit an administering organization from requiring membership as a precondition to conducting a peer review of a firm.
In response, the Board has revised § 11.83(a) to provide that any organization of licensed certified public accountants or licensed public accountants that participates in the AICPA Peer Review Program is deemed approved to administer a peer review program and does not require prior approval from the Board. As the Board stated in its notice of proposed rulemaking, because the AICPA Peer Review Program is universally recognized in the public accounting profession as the preeminent model for peer review, the least costly and most efficient way to implement peer review in this Commonwealth is to grant deemed approval status to any organization of licensed accounting professionals that employs the AICPA peer review model.
The Board has adopted the suggestion of IRRC and the PSPA to establish a regulatory mechanism by which peer review programs other than the AICPA's can be evaluated for appropriateness. To this end, the Board has revised § 11.83(b) to provide that an organization of licensed certified public accountants or licensed public accountants that does not qualify for deemed approval status under § 11.83(a) may apply to the Board for approval to serve as an administering organization. The Board will evaluate the application based on the following factors: (i) whether the organization has adequate financial and other resources to administer a peer review program; (ii) whether the organization has the technical competence to administer a peer review program; and (iii) whether the organization has an oversight peer review committee whose members are subject to and have successfully completed peer reviews and that is capable of retaining qualified peer reviewers, scheduling peer reviews, reviewing the results of peer reviewers, and recommending remedial action for firms that do not receive unqualified peer review reports.
The Board has added a new § 11.83(c) that restates proposed § 11.83(b) in a manner consistent with the recommendation of IRRC.
§ 11.84. (Peer review standards).
The Board has made editorial changes to § 11.84, which requires that a peer review be conducted in accordance with the AICPA's Peer Review Standards.
§ 11.85. (Qualifications of peer reviewers).
Proposed § 11.85(a) stated that, except as provided in subsections (b) and (c), a peer reviewer shall possess the qualifications set forth in the AICPA's Peer Review Standards. Proposed § 11.85(b) provided that a licensed public accountant who otherwise satisfies the requirements of proposed § 11.85(a) shall be qualified to serve as a peer reviewer; proposed § 11.85(c) provided that a sole practitioner with a public accounting or auditing practice who otherwise satisfies the requirements of proposed § 11.85(a) and who is enrolled in a peer review program shall be qualified to serve as a peer reviewer. Proposed § 11.85(d) provided that a peer reviewer shall be independent from, and have no conflict of interest with, the firm being reviewed.
IRRC commented that the proposed regulations do not specify how the Board would determine whether a prospective peer reviewer is qualified. IRRC also questioned the meaning of the phrase ''who otherwise satisfies the requirements of subsection (a)'' in proposed § 11.85(b) and (c).
To state with greater clarity who is eligible to serve as a peer reviewer, the Board has consolidated proposed § 11.85(a)--(c) into a revised § 11.85(a), which provides that a peer reviewer shall be a licensed certified public accountant or licensed public accountant, whether a sole practitioner or part of a group practice, who is enrolled in a peer review program and who possesses the qualifications in the AICPA's Peer Review Standards. The Board has also revised § 11.85(b) to state that the peer review administering organization shall be responsible for ensuring that its peer reviewers are qualified. The Board has also renumbered § 11.85(d) as § 11.85(c).
Statutory Authority
Section 8.9(c) of the CPA Law empowers the Board to promulgate regulations approving peer review programs and standards, establishing qualifications of peer reviewers and prohibiting unauthorized disclosure of information obtained during peer review.
Fiscal Impact and Paperwork Requirements
The final-form regulations will 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 final-form regulations will 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 final-form regulations will 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 regulations also will require the Board to revise its forms for initial licensure and license renewal. The regulations will 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 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)), the Board submitted copies of the notice of proposed rulemaking, published at 29 Pa.B. 4448, to IRRC and the House and Senate Committees for review and comment.
In adopting final-form regulations, the Board considered comments from IRRC, the House Committee and the general public. The Board did not receive comments from the Senate Committee.
On September 25, 2000, the Board submitted the final-form regulations to IRRC and the House and Senate Committees for review. On October 6, 2000, under authority of section 5.1(g)(1) of the Regulatory Review Act (71 P. S. § 745.5a(g)(1)), the Board tolled the review period to correct an error in the final-form regulations, and submitted revised final-form regulations on that date. Under section 5.1(g)(3) of the Regulatory Review Act, the revised final-form regulations were approved by the House Committee on October 11, 2000, and deemed approved by the Senate Committee on October 16, 2000. The final-form regulations were approved by IRRC on October 19, 2000.
Additional Information
Individuals who desire additional information about the regulations are invited to submit inquiries to Steven Wennberg, Esq., Counsel, State Board of Accountancy, P. O. Box 2649, Harrisburg, PA 17105-2649.
Findings
The Board finds that:
(1) Public notice of the Board's intention to amend Chapter 11, by this order has been given under sections 201 and 202 of the act of July 31, 1968 (P. L. 769, No. 240) (45 P. S. §§ 1201 and 1202), and the regulations thereunder, 1 Pa. Code §§ 7.1 and 7.2.
(2) The final-form regulations adopted by this order are necessary and appropriate for the administration of the CPA Law.
Order
The Board, acting under its authorizing statute, orders that:
(a) The regulations of the Board, 49 Pa. Code Chapter 11, are amended by adding §§ 11.81--11.86 to read as set forth in Annex A.
(b) The Board shall submit this order and Annex A to the Office of the Attorney General and the Office of General Counsel for approval as required by law.
(c) The Board shall certify this order and Annex A and deposit them with the Legislative Reference Bureau as required by law.
(d) The regulations shall take effect upon publication in the Pennsylvania Bulletin.
THOMAS J. BAUMGARTNER, CPA,
Chairperson(Editor's Note: For the text of the order of the Independent Regulatory Review Commission, relating to this document, see 30 Pa.B. 5807 (November 4, 2000).)
Fiscal Note: Fiscal Note 16A-556 remains valid for the final adoption of the subject regulations.
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 this section and §§ 11.82--11.86 (relating to peer review), have the following meanings, unless the content clearly indicates otherwise:
Administering organization--An entity that meets the standards specified by the Board for administering a peer review program.
Audit engagement--An audit as defined in the AICPA's Statement on Auditing Standards.
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).
Offsite peer review--An engagement review as defined in the AICPA's Standards for Performing and Reporting on Peer Reviews, including interpretations thereof, excepting a study of the associated working papers.
Onsite peer review--A system review as defined in the AICPA's Standards for Performing and Reporting on Peer Review, including interpretations thereof.
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.
Review engagement--A review as defined in the AICPA's Statement of Standards on Accounting and Review Services.
Sole practitioner--A licensed certified public accountant or licensed public accountant who practices public accounting on his own behalf.
§ 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 an onsite peer review before the license biennium that begins May 1, 2002.
(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 an offsite peer review before the license biennium that begins May 1, 2006.
(c) A nonexempt firm that performs an audit or review engagement 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 that performs an audit or review engagement is entitled to an exemption from peer review if any of the three conditions in section 8.9(g) of the act apply. A firm claiming an exemption shall submit with its application for initial licensure or license renewal information that substantiates its entitlement to an exemption as follows:
(1) Exemption under section 8.9(g)(1) of the act. Both of the following:
(i) A letter from an 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.
(ii) A statement that the firm's internal inspection or monitoring procedures require that 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.
(2) Exemption under section 8.9(g)(2) of the act. A notarized statement from the firm that the following conditions have been met:
(i) The firm has not accepted or performed any audit or review engagement during the preceding 2 years.
(ii) The firm does not intend to accept or perform any audit or review engagement during the next 2 years.
(iii) The firm agrees to notify the Board within 30 days of accepting an audit or review engagement and to undergo a peer review within 18 months of commencing the engagement.
(3) Exemption under section 8.9(g)(3) of the act. One or more of the following:
(i) A physician's statement that a specified medical condition prevents the firm from completing a timely peer review.
(ii) A statement from the appropriate military authority that military service prevents the firm from completing a timely peer review.
(iii) A notarized statement from the firm setting forth unforeseen exigent circumstances that prevent the firm from completing a timely peer review.
§ 11.83. Administering organizations for peer review; firm membership not required.
(a) The following organizations are deemed qualified to administer peer review programs and do not require prior approval from the Board:
(1) The Securities and Exchange Commission Practice Section and the Private Companies Practice Section of the AICPA.
(2) Any organization of licensed certified public accountants or licensed public accountants that participates in the AICPA Peer Review Program.
(b) An organization of licensed certified public accountants or licensed public accountants that does not qualify as an administering organization under subsection (a) may apply to the Board for approval to serve as an administering organization. In determining whether to grant approval. The Board will consider the following factors:
(1) Whether the organization has adequate financial and other resources to administer a peer review program.
(2) Whether the organization has the technical competence to administer a peer review program.
(3) Whether the organization has a peer review oversight committee that meets the following conditions:
(i) Whose members are subject to and have successfully completed peer reviews.
(ii) That is capable of retaining qualified peer reviewers, scheduling peer reviews, reviewing the results of peer reviews and recommending appropriate remedial action for firms that do not receive unqualified peer review reports.
(c) An administering organization may not require a firm to become a member of the administering organization as a precondition for the administering organization to conduct a peer review of the firm.
§ 11.84. Peer review standards.
A peer review shall be conducted in accordance with the AICPA's ''Standards for Performing and Reporting on Peer Reviews'' including interpretations thereof.
§ 11.85. Qualifications of peer reviewers.
(a) A peer reviewer shall be a licensed certified public accountant or licensed public accountant, whether a sole practitioner or part of a group practice. Who is enrolled in a peer review program and who possesses the qualifications set forth in the AICPA's ''Standards for Performing and Reporting on Peer Reviews'' including interpretations thereof.
(b) The administering organization shall ensure that its peer reviewers are qualified under subsection (a).
(c) 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) 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).
(b) The Board has the right to inquire of an administering organization whether a peer review report has been accepted.
[Pa.B. Doc. No. 00-2059. Filed for public inspection December 1, 2000, 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.
