California Board of Accountancy

Peer Review Oversight Committee (PROC) Meeting

May 5, 2017

10:00 a.m. 12:00 p.m.

Marriot Burbank Airport Hotel 2500 North Hollywood Way

Burbank, CA 91505 Telephone: (818) 483-6000

CBA MISSION: To protect consumers by ensuring only qualified licensees practice public accountancy in accordance with established professional standards

CALIFORNIA BOARD OF ACCOUNTANCY (CBA) PEER REVIEW OVERSIGHT COMMITTEE (PROC)

PROC MEETING NOTICE & AGENDA

May 5, 2017 10:00 a.m. 12:00 p.m.

Marriott Burbank Airport Hotel 2500 North Hollywood Way

Burbank, CA 91505 Telephone: (818) 483-6000

Important Notice to the Public All times indicated, other than those identified as time certain, are approximate and subject to change. Agenda items may be discussed and action taken out of order at the discretion of the

PROC Chair. The meeting may be canceled without notice. For verification of the meeting, call (916) 561-4366 or access the CBA website at www.cba.ca.gov.

I. Call to Order, Roll Call, Establishment of Quorum, and Opening Remarks (Jeffrey De Lyser, CPA, Chair).

II. Report of the Committee Chair (Jeffrey De Lyser). A. Approval of the February 3, 2017 Peer Review Oversight Committee Meeting

Minutes.

B. Report on the March 23-24, 2017 California Board of Accountancy Meeting (CBA Liaison).

C. Discussion of Emerging Issues and/or National Standards Regarding the Peer Review Program Impacting California.

III. Report on Peer Review Oversight Committee Oversight Activities Conducted since February 3, 2017 (Jeffrey De Lyser) A. Report on the February 23, 2017 California Society of Certified Public

Accountants Review Acceptance Board Meeting.

B. Report on the March 20, 2017 American Institute of Certified Public Accountants Training on the Peer Review Integrated Management Application Computer Database.

http://www.cba.ca.gov/

C. Report on the March 22, 2017 California Society of Certified Public Accountants Review Acceptance Board Meeting.

D. Report on the April 20, 2017 California Society of Certified Public Accountants Review Acceptance Board Meeting.

E. Report on the April 24, 2017 California Society of Certified Public Accountants Training; Auditing, Assurance & Employee Benefit Plans Conference.

F. Report on Notices Posted on the American Institute of Certified Public Accountants and National Association of State Boards of Accountancys Websites Regarding Changes and Updates to the Peer Review Program.

G. Discussion on the Summary of Peer Reviewer Training Courses Checklist (Ben Simcox, Deputy Chief, Enforcement Division).

H. Assignment of Future Peer Review Oversight Committee Oversight Roles, Responsibilities, Activities, and Assignments (Siek Run, Enforcement Analyst).

IV. Report of the Enforcement Chief (Dominic Franzella, Chief, Enforcement Division). A. Discussion Regarding the American Institute of Certified Public Accountants

January 2017 Peer Review Administration White Paper on the Evolution of Peer Review.

B. Discussion and Action on Proposed Peer Review Oversight Committee Letter to California Society of Certified Public Accountants Regarding Peer Reviewer Population Statistics.

C. Discussion Regarding Data Compiled on Peer Review-Related Statistics.

V. Closing Business (Jeffrey De Lyser). A. Public Comments for Items Not on the Agenda.

B. Agenda Items for Future Peer Review Oversight Committee Meetings.

VI. Adjournment.

Action may be taken on any item on the agenda. In accordance with the Bagley-Keene Open Meeting Act, all meetings of the PROC are open to the public. Government Code section 11125.7 provides the opportunity for the public to address each agenda item during discussion or consideration by the PROC prior to the PROC taking any action on said item. Members of the public will be provided appropriate opportunities to comment on any issue before the PROC, but the PROC Chair may, at his or her discretion, apportion available time among those who wish to speak. Individuals may appear before the PROC to discuss items not on the agenda; however, the PROC can neither discuss nor take official action on these items at the time of the same meeting. CBA members who are not members of the PROC may be attending the meeting. However, if a majority of members of the full board are present at the PROC meeting, members who are not members of the PROC may attend the meeting only as observers.

The meeting is accessible to individuals with physical disabilities. A person who needs a disability-related accommodation or modification in order to participate in the meeting may make a request by contacting Siek Run at (916) 561-4366, or by email at Siek.Run@cba.ca.gov, or send a written request to the CBA office at 2450 Venture Oaks Way, Suite 300, Sacramento, CA 95833. Providing your request at least five (5) business days before the meeting will help to ensure availability of the requested accommodation.

For further information regarding this meeting, please contact:

Siek Run, Enforcement Analyst (916) 561-4366 or Siek.Run@cba.ca.gov California Board of Accountancy 2450 Venture Oaks Way, Suite 300 Sacramento, CA 95833

An electronic copy of this agenda can be found at www.cba.ca.gov.

mailto:Siek.Run@cba.ca.govhttp://www.cba.ca.gov/mailto:Siek.Run@cba.ca.gov

Page 1

PROC Item II.A.

May 5, 2017

DRAFT

DEPARTMENT OF CONSUMER AFFAIRS CALIFORNIA BOARD OF ACCOUNTANCY (CBA)

MINUTES OF THE February 3, 2017

PEER REVIEW OVERSIGHT COMMITTEE (PROC) MEETING

California Board of Accountancy 2000 Evergreen Street, Suite 250

Sacramento, CA 95815 Telephone: (916) 263-3680

I. Call to Order, Roll Call, Establishment of Quorum, and Opening Remarks.

Jeffrey De Lyser, CPA, PROC Chair, called the meeting of the PROC to order at 10:03 a.m. on Friday, February 3, 2017. The meeting adjourned at 12:48 p.m. Mr. De Lyser read the following into the record: The CBAs mission is to protect consumers by ensuring only qualified licensees practice public accountancy in accordance with established professional standards. This mission is derived from the statutory requirement that protection of the public shall be the highest priority for the California Board of Accountancy in exercising its licensing, regulatory, and disciplinary functions. Whenever the protection of the public is inconsistent with other interests sought to be promoted, the protection of the public shall be paramount. Members Jeffry De Lyser, CPA, Chair 10:03 a.m. 12:48 p.m. Kevin Harper, CPA, Vice-Chair 10:03 a.m. 12:48 p.m. Katherine Allanson, CPA 10:03 a.m. 12:48 p.m. Nancy Corrigan, CPA 10:03 a.m. 12:48 p.m. Robert Lee, CPA Absent Renee Graves, CPA 10:03 a.m. 12:48 p.m. Sherry McCoy, CPA 10:03 a.m. 12:48 p.m.

CBA Staff Patti Bowers, Executive Officer Dominic Franzella, Chief, Enforcement Division Ben Simcox, CPA, Deputy Chief, Enforcement Division Kari OConnor, Enforcement Manager Siek Run, Enforcement Analyst

Other Participants Linda McCrone, CPA, California Society of Certified Public Accountants (CalCPA) Vinit Shrawagi, CPA, CalCPA

II. Report of the Committee Chair.

A. Approval of the December 9, 2016 PROC Meeting Minutes.

Mr. De Lyser requested PROC members to review and provide feedback or edits to the December 9, 2016 PROC Meeting Minutes.

Members provided corrections to the minutes.

It was moved by Mr. Harper and seconded by Mr. De Lyser to approve the meeting minutes as corrected.

Yes: Ms. McCoy, Mr. De Lyser, Mr. Harper, and Ms. Graves

No: None.

Abstain: Ms. Allanson and Ms. Corrigan.

The motion passed.

B. Report on the January 26, 2017, California Board of Accountancy Meeting.

Mr. De Lyser provided the PROC a summary of the January 26, 2017 CBA Meeting. He highlighted a variety of topics discussed during the meeting including the CBA budget for Fiscal Year 2017/18, and amendments to Business and Professions Code section 5063.3 and the California Code of Regulations sections 98 and 99.1. Mr. De Lyser informed the PROC that the next CBA meeting will be held in Los Angeles, on March 23-24, 2017.

C. Discussion of Emerging Issues and/or National Standards Regarding the Peer Review Program Impacting California.

No report.

III. Report on Peer Review Oversight Committee Oversight Activities Conducted since December 9, 2016.

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A. Report on the January 31, 2017, American Institute of Certified Public Accountants Peer Review Body Meeting.

Mr. Harper provided a brief overview of the January 31, 2017 American Institute of Certified Public Accountants (AICPA) Peer Review Body Meeting. He noted that the AICPA focused on firm population completeness. He further noted that of the 24,000 firms required to have a peer review, 139 firms did not have completed peer reviews.

B. Report on the February 1, 2017 California Society of Certified Public Accountants Review Acceptance Board Meeting.

Ms. Corrigan reported on this item. She provided an overview of the CalCPA Review Acceptance Board (RAB) Meeting. She noted that 45 reports were reviewed by the RAB.

C. Report on the Notices Posted on the American Institute of Certified Public Accountants and National Association of State Boards of Accountancys Websites Regarding Changes and Updates to the Peer Review Program.

Ms. Graves provided an overview of this agenda item. She noted that the National Association of State Boards of Accountancys (NASBA) website did not have new peer review-related press releases or comment letters. She further noted that the AICPA website updates focused on peer review program changes to expect in 2017, information on the 2017 AICPA Peer Review Conference, and upcoming AICPA Peer Review Integrated Management Application system trainings.

D. Discussion on the Revisions to the Peer Review Oversight Committee Administrative Site Visit Procedures.

Mr. Simcox introduced this agenda item. The PROC discussed the Administrative Site Visit procedures and checklists presented and felt they were appropriate for the administrative site visit activity. PROC members provided edit suggestions where clarifications were needed.

It was moved by Mr. De Lyser and seconded by Ms. Graves to approve the newly developed Administrative Site Visit procedure checklists as amended with the suggested edits to be used in the following year and to incorporate the checklist in the standard PROC procedures to review and update as needed.

Yes: Ms. McCoy, Ms. Allanson, Ms. Corrigan, Mr. De Lyser, Mr. Harper, and Ms. Graves

No: None.

Abstain: None.

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The motion passed.

E. Discussion on the Revision to the Peer Review Oversight Committee Summary of Oversight of Out-of-State Peer Review Administering Entity Checklist.

Mr. Simcox presented this agenda item and provided a brief overview. PROC members discussed the edits made during the December 2016 PROC meeting.

It was moved by Ms. Allanson and seconded by Ms. Corrigan to approve the revised PROC Summary of Oversight of Out-of-State Peer Review Administering Entity Checklist with the suggested amendments.

Yes: Ms. McCoy, Ms. Allanson, Ms. Corrigan, Mr. De Lyser, Mr. Harper, and Ms. Graves

No: None.

Abstain: None.

The motion passed.

F. Assignment of Future Peer Review Oversight Committee Oversight Roles, Responsibilities, Activities, and Assignments.

Ms. Run presented this agenda item and highlighted new 2017 PROC activities. Mr. De Lyser requested members to volunteer and accept new assignments.

CalCPA RAB:

February 23, 2017 Nancy Corrigan (2:00 p.m. Call)

March 22, 2017 Renee Graves (9:00 a.m. Call)

April 20, 2017 Katherine Allanson (9:00 a.m. Call)

CBA Meeting:

March 23-24, 2017 Jeffrey De Lyser (in-person, Los Angeles)

CalCPA Peer Reviewer Training:

April 24, 2017 Jeffrey De Lyser (in-person, Burbank)

AICPA Peer Review Committee Meeting:

May 12, 2017 Nancy Corrigan (Call)

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CalCPA Peer Review Committee Meeting:

May 26-27, 2017 Kevin Harper (in-person, Laguna Niguel)

PROC members discussed having members attend both the CalCPA Auditing,

Assurance & Employee Benefit Plans Conference, scheduled for

April 24, 2017 and the NASBA PROC Summit upon receiving clarifying meeting details.

IV. Report of the Enforcement Chief.

A. Discussion on the Draft 2016 Peer Review Oversight Committees Annual Report.

Mr. Franzella presented this agenda item. He reviewed edits made by staff since the December 2016 PROC Meeting and noted the newly added Chairs message which highlighted revisions to the Administrative Site Visit procedures, new PROC oversight assignments on peer reviewer population from the CBA, and recruitment for new PROC members. Lastly, he requested that the PROC approve the Annual Report as presented and to delegate to the PROC Chair to work with staff on additional edits as needed.

PROC members discussed the Annual Report and provided edits.

It was moved by Ms. Allanson and seconded by Mr. Harper to approve for presentation at the CBAs March 2017 meeting, the 2016 PROC Annual Report and delegate to the PROC Chair to work with staff on additional edits as needed.

Yes: Ms. McCoy, Ms. Allanson, Ms. Corrigan, Mr. De Lyser, Mr. Harper, and Ms. Graves

No: None.

Abstain: None.

The motion passed.

B. Discussion on the California Society of Certified Public Accountants Peer Review Program Annual Report on Oversight for the Calendar Year 2015, Issued October 6, 2016.

Mr. Franzella presented this agenda item. He noted that the report provided an overview of oversight activities, peer review-related statistics, and the results of the various oversight procedures performed on the CalCPA Peer Review Program for the calendar year 2015.

PROC members discussed the data presented in the report and updates to the Facilitated State Boards Access website.

Page 5

C. Discussion on the American Institute of Certified Public Accountant Peer Review Program, National Peer Review Committee, 2015 Annual Report on Oversight, Issued October 27, 2016.

None.

D. Discussion on the Administrative Oversight of the National Peer Review Committee Result Letter, Issued September 14, 2016.

Mr. Franzella provided an overview of this agenda item. PROC members expressed that the information included in the National Peer Review Committee (NPRC) letter was not sufficient for the PROC to determine the severity of issues, if any existed. PROC members further discussed their experience with limited access to information regarding the NPRC peer review-related activities.

E. Discussion on the American Institute Certified Public Accountants, Paper Entitled: Proposed Evolution of Peer Review Administration, Revised January 2017.

Mr. Franzella provided an overview of this agenda item. He noted that the PROC was asked to review the paper and provide comments to the PROC Chair and staff to present at the March 2017 CBA Meeting.

PROC members discussed the report and determined that the PROC will continue to support efforts to improve the peer review program and enhancement of audit quality.

V. Closing Business.

A. Public Comments for Items Not on the Agenda.

Ms. McCrone provided additional follow-up information relating to oversight of peer reviewer continuing professional education (CPE). She specified that CalCPA takes appropriate steps to review peer reviewer applicants and their CPE prior to approval.

B. Agenda Items for Future Peer Review Oversight Committee Meetings.

The PROC members discussed items for future PROC meetings and suggested to bring back the following agenda items:

Peer Reviewer Population Peer Review Committee (PRC) Manual

Mr. Franzella explained to the PROC members that staff has a running list of agenda items to bring forth at future PROC Meetings.

VI. Adjournment.

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There being no further business, Mr. De Lyser adjourned the meeting at 12:48 p.m. on Friday, February 3, 2017.

Jeffrey De Lyser, CPA, Chair

Siek Run, Enforcement Analyst, prepared the PROC meeting minutes. If you have any questions, please call (916) 561-4366.

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PROC Item III.G. May 5, 2017

Discussion on the Summary of Peer Reviewer Training Course Checklist

Presented by: Ben Simcox, CPA, Deputy Chief, Enforcement Division

Purpose of the Item The purpose of this agenda item is to provide the Peer Review Oversight Committee (PROC) the opportunity to discuss the Summary of Peer Reviewer Training Course checklist (Attachment).

Consumer Protection Objectives By performing a routine review on recently used PROC checklists, members can ensure checklists remain relevant and assist the PROC in oversight activities. The PROCs Summary of Peer Reviewer Training Course checklist may require modifications to ensure that the PROC effectively oversights the activity.

Action(s) Needed It is requested that all members come prepared to discuss and contribute ideas to make the checklists more comprehensive, and be ready to accept assignments.

Background During the January 29, 2016 PROC meeting, members expressed the need to improve the PROC checklists to be more comprehensive for future PROC oversight activities. Members requested a standing agenda item to discuss and consider ways to improve all PROC oversight checklists, assign members to research, review policies and procedures outside of the PROC, and present their findings and recommendations to the PROC.

As part of its oversight activity, selected PROC members would participate in advance peer reviewer trainings provided by either the California Society of Certified Public Accountants or the American Institute of Certified Public Accountants. PROC members would observe and provide a report to the PROC. These oversights are summarized and presented to the California Board of Accountancy (CBA) as part of the PROC reporting and are referenced in the CBA PROC Annual Report.

Comments The PROC Summary Peer Reviewer Training Course checklist allows members to summarize and report to the CBA.

Discussion on the Summary of Peer Reviewer Training Course Checklist Page 2 of 2

Fiscal/Economic Impact Considerations There are no fiscal/economic considerations.

Recommendation Staff do not have recommendation on this agenda item.

Attachment Peer Review Oversight Committee Summary of Peer Reviewer Training Course Checklist

Peer Review Oversight Committee Attachment Summary of Peer Reviewer Training Course

Purpose: As part of its oversight activities, the Peer Review Oversight Committee (PROC) observes training provided to new and experienced peer reviewers as further described in the PROCs Procedure Manual. Peer reviewer training is provided throughout the United States; however, in California, training is generally provided twice each year, one class for new peer reviewers currently 16 hours over 2 days, and one class for experienced peer reviewers currently 8 hours on one day. Both classes are conducted with live instruction. Participants are provided with the materials upon arrival at the training location. The objective of this aspect of PROC oversight is to observe how the peer reviewers are trained and determine whether or not this aspect of the peer review process is operating effectively in the state of California.

Course Date:

Name of Peer Reviewer Training:

Name of Instructor:

EVALUATION OF THE TECHNICAL ASPECTS OF THE TRAINING CONTENT YES NO N/A

1. Does the instructor appear knowledgeable about:

The technical aspects of their reviews, both peer review standards as well as general audit and accounting standards.

Critical peer review issues and risk considerations (focus matters).

Industry specific issues (i.e. requirements of ERISA, Governmental Standards/Regulations, etc.).

The differences in matters, findings, deficiencies and significant deficiencies.

Appropriate types of reports.

Circumstances for requiring revisions to review documents.

2. Is the subject matter covered relevant to conducting peer reviews?

3. Did the course achieve the training objectives?

4. Comments regarding the overall evaluation of the technical aspects of the peer reviewer training:

Page 1 of 2

EVALUATION OF THE TRAINING PROCESS YES NO N/A

5. Does the instructor keep the class engaged and involved in discussions?

6. Does the instructor respond to questions from participants accurately and respectfully?

7. Is sufficient time allowed for material covered and experience level of participants?

8. Are the instructors presentations skills effective for this course?

9. Are the training materials relevant to the subject matter?

10. Are the training materials useful/organized as a reference guide to peer reviewers?

11. Comments regarding the overall evaluation of general training process:

CONCLUSION

12. Rate the training as to its effectiveness for its role in the peer review process:

Meets Expectations Does Not Meet Expectations*

13. Other comments, if any:

The above summary was prepared by:

Print Name Signature

* A rating of No or Does Not Meet Expectations requires a comment.

Page 2 of 2

PROC Item III.H. May 5, 2017

Assignment of Future Peer Review Oversight Committee Oversight Roles,

Responsibilities, Activities, and Assignments

Presented by: Siek Run, Enforcement Analyst

Purpose of the Item The purpose of this agenda item is to provide the Peer Review Oversight Committee (PROC) the opportunity to review and assign members to specific PROC oversight activities.

Consumer Protection Objectives By performing oversight activities of the California Board of Accountancys (CBA) recognized peer review program providers, the PROC is able to provide recommendations to the CBA on the effectiveness of the peer review program, which furthers the CBAs mission of consumer protection.

Action(s) Needed It is requested that all members bring their calendars to the May 5, 2017, PROC Meeting and be prepared to accept assignments.

Background None.

Comments The 2017 CBA Meeting Dates and Locations and PROC Year-at-a-Glance calendars, the Activity Assignments, and the Roles and Responsibility Activity Tracking sheet (Attachments 1, 2, 3 and 4) are provided for the PROC to reference 2017 PROC activities to be assigned relating to the following entities:

CBA PROC American Institute of Certified Public Accountants (AICPA) Peer Review

Board

California Society of Certified Public Accountants (CalCPA) Report Acceptance Body

CalCPA Peer Review Committee

Assignment of Future Peer Review Oversight Committee Oversight Roles, Responsibilities, Activities, and Assignments Page 2 of 2

National Association of State Boards of Accountancy (NASBA) Compliance Assurance Committee

Fiscal/Economic Impact Considerations There are no fiscal/economic considerations.

Recommendation It is recommended that members continue to use the documents provided as resources when accepting assignments to participate in meetings and activities held by the AICPA, CalCPA, and NASBA.

Attachments 1. 2017 CBA Meeting Dates/Locations 2. 2017 CBA PROC Year-at-a-Glance Calendar 3. 2017 Peer Review Oversight Committee (PROC) Activity Assignments 4. 2017 Peer Review Oversight Committee (PROC) Roles and Responsibilities Activity

Tracking

CALIFORNIA BOARD OF ACCOUNTANCY (CBA)Attachment 1 2017 MEETING DATES/LOCATIONS CALENDAR

(CBA MEMBER COPY)

JANUARY 2017 FEBRUARY 2017 MARCH 2017 APRIL 2017 S M T W Th F S

1 2 3 4 5 6 7

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SC SC 29 30 31

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MAY 2017 JUNE 2017 JULY 2017 AUGUST 2017 S M T W Th F S

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S M T W Th F S 1 2 3 4 5

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SEPTEMBER 2017 OCTOBER 2017 NOVEMBER 2017 DECEMBER 2017 S M T W Th F S

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SC SC 17 18 19 20 21 22 23

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COMMITTEES GENERAL LOCATION EAC - Enforcement Advisory Committee NC-NORTHERN CALIFORNIA

QC - Qualifications Committee SC-SOUTHERN CALIFORNIA

PROC - Peer Review Oversight Committee

MSG-Mobility Stakeholder Group CBA OFFICE CLOSED CBA MEETING EAC MEETING PROC MEETING QC MEETING MSG MEETING

4/25/2017

Attachment 2 CALIFORNIA BOARD OF ACCOUNTANCY (CBA) PEER REVIEW OVERSIGHT COMMITTEE (PROC) CALENDAR

2017 Year-at-a-Glance Calendar (As of March 29, 2017)

JANUARY 2017 FEBRUARY 2017 MARCH 2017 APRIL 2017 S M T W Th F S

1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24 25 26 27 28

SC SC SC 29 30 31

S M T W Th F S 1 2 3

NC

4

5 6 7 8 9 10 11

12 13 14 15 16 17 18

19 20 21 22 23 24 25

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S M T W Th F S 1 2 3 4

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SC SC 26 27 28 29 30 31

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MAY 2017 JUNE 2017 JULY 2017 AUGUST 2017 S M T W Th F S

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S M T W Th F S 1 2 3 4 5

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NC 27 28 29 30 31

SEPTEMBER 2017 OCTOBER 2017 NOVEMBER 2017 DECEMBER 2017 S M T W Th F S

1 2

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SC SC 17 18 19 20 21 22 23

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COMMITTEE/TASK FORCE GENERAL LOCATION CBA - California Board of Accountancy NC-NORTHERN CALIFORNIA ON SHADED DATES CBA OFFICE IS PROC - Peer Review Oversight Committee SC-SOUTHERN CALIFORNIA CBA MEETING AICPA - American Institute of Certified Public Accountants PROC MEETING PRB - Peer Review Board AICPA PRB MEETING CalCPA - California Society of Certified Public Accountants CalCPA RAB MEETING RAB - Report Acceptance Body CalCPA PRC MEETING PRC - Peer Review Committee PEER REVIEWER TRAINING NASBA - National Assoc. of State Boards of Accountancy ADMINISTRATIVE SITE VISIT CAC - Compliance Assurance Committee NASBA CAC MEETING

4/25/2017

2017 Peer Review Oversight Committee (PROC) Attachment 3 Activity Assignments

Date Activity Member Assigned January 26, 2017 CBA Meeting, Southern California De Lyser January 31, 2017 AICPA PRB Open Session Meeting (Naples, FL) (Call) Harper

February 1, 2017 CalCPA RAB 2:00 p.m. (Call) Corrigan

February 23, 2017 CalCPA RAB 2:00 p.m. (Call) Corrigan

March 20, 2017 AICPA PRIMA Training (Webcast) De Lyser

March 22, 2017 CalCPA RAB 9:00 a.m. (Call) Graves

March 23-24, 2017 CBA Meeting, Southern California De Lyser April 20, 2017 CalCPA RAB 9:00 a.m. (Call) Lee

April 24-25, 2017 CalCPA Auditing, Assurance & Employee Benefit Plans Conference (2 Hour Peer Review Update)(Southern, CA)

De Lyser

May 2017 Assign PROC Members to Administrative Site Visit Activity

May 12, 2017 AICPA PRB Open Session Meeting (Durham, NC) (Call) Corrigan

May 18-19, 2017 CBA Meeting, Southern California

May 19, 2017 NASBA CAC/PROC 9:00 a.m. PST/11:00 a.m. CST (Call)

May 26-27, 2017 CalCPA PRC Meeting (Laguna Niguel, CA) Harper

June 2017 PROC Administrative Site Visit Letter to AE Arrange Site Visit and Requesting Documents

June 20, 2017 CalCPA RAB 9:00 a.m. and 2:00 p.m. (Call)

July 20-21, 2017 CBA Meeting, Northern California

August 17, 2017 AICPA PRB Open Session Meeting (Nashville, TN) (Call)

August 25, 2017 PROC Administrative Site Visit PROC Risk Assessment

September 14-15, 2017 CBA Meeting, Southern California

September 2017 PROC Administrative Site Visit Conduct Site Visit

September 29, 2017 AICPA PRB Open Session Meeting (Call)

October 2017 PROC Oversight of Out-of-State Administering Entities

November 2017 PROC Administrative Site Visit Submit Summary Report

1

November 2017 NASBA CAC (TBD)

November 16-17, 2017 CBA Meeting, Northern California November 16-17, 2017 CalCPA PRC Meeting (Yountville, CA)

Updated March 29, 2017

2

Attachment 4 Peer Review Oversight Committee (PROC) Roles and Responsibilities Activity Tracking 2017

As of March 29, 2017

Activity* Notes PROC MEETINGS Conduct four one-day meetings.

PROC 2017 Meetings: PROC Meetings Scheduled: 2/3, 5/5, 8/25, 12/8 PROC Meetings Attended: 2/3, 5/5

ADMINISTRATIVE SITE VISITS Conduct, at a minimum, an annual administrative site visit of the peer review program provider.

CalCPA Site Visits: 1. Assign PROC members: 2. Letter to AE Arrange Site Visit and Request Documents: 3. PROC Risk Assessment with All Members: 4. Conduct CalCPA Administrative Site Visit: 5. Complete Summary Report:

PEER REVIEW COMMITTEE MEETINGS Attend all peer review program providers Peer Review Board (PRB) and Peer Review Committee

(PRC) meetings.

Perform, at a minimum, an annual review of peer review program providers Peer Review Committees. Ensure peer review program provider is adhering to California Board of Accountancy (CBA) standards.

American Institute of Certified Public Accountants (AICPA) PRB: Meetings Scheduled: 1/31, 5/12, 8/17, 9/29

Meetings Attended: 1/31 KH,

PEER REVIEW SUBCOMMITTEE MEETINGS Attend and review at least four of each peer review program providers peer review Report Acceptance

Body (RAB) subcommittee meetings to observe the acceptance of peer review reports.

Ensure that peer reviews are being accepted in a consistent manner.

CalCPA Peer Review Subcommittees: RAB Meetings Scheduled: 2/1, 2/23, 3/22, 4/20, 6/20 RAB Meetings Attended: 2/1 NC, 2/23 NC, 3/22 RG

PRC Meetings Scheduled: 5/26-27, 11/16-17 PRC Meetings Attended:

NATIONAL STATE BOARDS OF ACCOUNTANCY (NASBA) MEETINGS Attend and review the National State Boards of Accountancy (NASBA) Compliance Assurance

Committee (CAC) meetings

Ensure effective oversight of compliance with professional standards by CPAs and their firms

Meetings Attended: NASBA CAC/PROC: Meetings Scheduled: 5/19 Meetings Attended:

REVIEW OF OUT-OF-STATE ADMINISTERING ENTITIES (AE) Each year, review AICPA oversight visit reports for a selection of out-of-state administering entities

2017 Out-of-State Administering Entities: Assigned: Reviews Completed:

REVIEW SAMPLING OF PEER REVIEWS Perform sampling of peer review reports.

See Administrative Site Visit

PEER REVIEWER TRAININGS Ensure that peer reviewers are properly qualified.

Training Scheduled: AICPA/CalCPA Peer Review Conference Meetings Scheduled: 4/24-25 Meetings Attended: 4/24 JD

EVALUATION OF BOARD-RECOGNIZED PEER REVIEW PROGRAM PROVIDERS Develop policies and procedures for reviewing and recommending approval to the CBA for new peer

review providers.

Evaluation of AICPA:

ANNUAL REPORT TO THE CALIFORNIA BOARD OF ACCOUNTANCY (CBA) Prepare an annual report to the CBA regarding the results of its oversight of the Peer Review program.

2017 PROC Annual Report:

CBA MEETINGS Meetings Scheduled: 1/26, 3/23-24, 5/18-19, 7/20-21, 9/14-15, 11/16-17 Meetings Attended: 1/26-27 JD, 3/23-24 JD

ADDITIONAL ACTIVITIES *Activities based on the February 3, 2017 PROC Meeting

PROC Item IV.A. May 5, 2017

Discussion Regarding the American Institute of Certified Public Accountants January 2017 Peer Review Administration White Paper on the Evolution of Peer

Review

Presented by: Dominic Franzella, Chief, Enforcement Division

Purpose of the Item The purpose of this agenda item is to provide the Peer Review Oversight Committee (PROC) the opportunity to further discuss the American Institute Certified Public Accountants (AICPA) papers on Peer Review Administration and comment letters from state societies in response to the AICPAs paper entitled, Proposed Evolution of Peer Review Administration, Revised January 2017 A Discussion Paper Seeking Input from State CPAs and State Boards of Accountancy, issued January 4, 2017 (Attachment 1).

Consumer Protection Objectives The CBA Peer Review Program is an important component of the CBAs mission to protect consumers by ensuring only qualified licensees practice public accountancy in accordance with applicable professional standards. The CBA Peer Review Program is administered through a Board-recognized peer review program provider. The AICPA Peer Review Program is presently the only recognized provider in California, so ensuring its overall effectiveness is crucial to the effectiveness of the CBA Peer Review Program.

Action(s) Needed No specific action is required on this agenda item.

Background In February 2016, the AICPA released a paper titled, Proposed Evolution of Peer Review Administration (Paper). The Paper discusses a proposed plan to increase the quality, consistency, efficiency and effectiveness in the administration of peer review ... requested feedback from state societies that administer the AICPA Peer Review Program by August 1, 2016.

On July 18, 2016, AICPA released a second paper to supplement the discussion on the AICPAs Paper, which sought input from state boards of accountancy (Attachment 2).

Discussion Regarding the American Institute of Certified Public Accountants January 2017 Peer Review Administration White Paper on the Evolution of Peer Review Page 2 of 4

In both papers, the AICPA was considering a significant reduction in the number of administering entities (AEs) nationally, from 43 to between eight to 10, and required each AE to conduct approximately 1,000 reviews annually.

At its August 19, 2016 meeting, the PROC discussed the AICPAs papers on the evolution of the peer review administration. In addition, the PROC heard from representatives from California Society of Certified Public Accountants (CalCPA), which is the AE for the AICPA Peer Review Program in California.

The PROC considered the potential impact of a reduction in AEs would have on the CBAs ability to effectively oversight the AICPA Peer Review Program, which is primarily done through oversight activities focused on CalCPA. The CalCPA representatives informed the PROC that it would continue to operate as an AE under the AICPA Peer Review Program and would not be part of the contraction of EAs being considered by the AICPA nor would the CalCPA be considering an expansion of its current AE activities beyond the current states that it already administers (California, Alaska, and Arizona).

This confirmation provided assurances that the CBA, through the PROC, would be able to continue to effectively oversight the AICPA Peer Review Program. Therefore, the PROC believed the CBA should support those efforts being undertaken by the AICPA to enhance the effectiveness, consistency, and quality of peer reviews. The PROC did express concerns with the cost of peer review increasing and the peer reviewer population.

At the CBAs September 2016 meeting, the PROC reported its conclusions to the CBA, which subsequently adopted a letter (Attachment 3) that conveyed the CBAs support of those efforts undertaken by the AICPA to enhance the effectiveness, consistency, and quality of peer reviews. Included in the letter, the CBA noted that it would be paying close attention to the peer reviewer population.

Comments On October 21, 2016, the National Association State Boards of Accountancy (NASBA) published a comment letter in response to the AICPAs July 18, 2016 supplemental paper (Attachment 4). In the letter NASBA indicated that it had surveyed 36 state boards of accountancy and reviewed 12 individual state boards letter to AICPA. NASBA noted its appreciation of the AICPAs efforts to improve the peer review process and the commitment to enhancing audit quality. NASBA also noted its support in the AICPAs goal to enhancing quality in the peer review administration. NASBA, however, noted six areas of concerns and requested that the AICPA consider these areas as part of the evolution process (Attachment 2, page 2).

For a more direct understanding of the overall responses to the AICPAs July 18, 2016 supplemental paper, CBA staff researched and reviewed three additional comment letters from state societies such as New York, Virginia, and Florida (Attachment 5). Although a majority of the comment letters are not accessible, the documents retrieved

Discussion Regarding the American Institute of Certified Public Accountants January 2017 Peer Review Administration White Paper on the Evolution of Peer Review Page 3 of 4

appear to support NASBAs findings, indicating support of enhancing audit quality and improving consistency across the peer review program and concerns similar to NASBA. The areas of concerns are listed below:

Oversight Oversight by State Boards of Accountancy (Boards) Costs Peer Review Cost Consolidation Reduction of number of AEs from 41 to between eight and 10 National AE AICPA continuing to oversight other AEs while concurrently operating

as an AE

Review/Volunteer Pool Relating to the peer reviewer population and volunteers for the Report Acceptance Body (RAB)

Transparency Access to peer review data from the AICPA Peer Review Program for a more effective oversight

Time Unattainable deadlines for AEs to decide whether to continue to participate in the peer review program and/or initiate implementations

On January 4, 2017, AICPA released a revised discussion paper entitled, Proposed Evolution of Peer Review Administration, Revised January 2017. The feedback period ends June 30, 2017.

With consideration of the feedback received from its original proposals, the January 2017 revised AICPA paper, includes revisions to the administration model for the planned reduction of AEs, the required number of reviews annually, AE staffing requirements, benchmarks required for AEs, increased transparency of AE performance, and a revised fair procedures process model for AEs that fail to meet the benchmarks.

Although several of the issues raised by NASBA, state societies, and state boards of accountancy were addressed, there remains concern regarding:

The function of the Boards oversight of the program Maintenance of a qualified reviewer pool and achievement of transparency The possibility of state societies deciding to discontinue their participation in the

program

Potential increase of the cost and how it may impact CPAs, peer reviewers, and AEs

Transition to national AEs Implications of a decrease in the peer reviewer population

At its February 3, 2017 meeting, the PROC discussed the AICPAs revised discussion paper and the proposed changes and how they could impact the CBAs ability to effectively oversight the AICPA Peer Review Program. The PROC determined that the proposed changes will not impact the CBAs ability to oversight the AICPA Peer Review Program and therefore, the PROC believed the CBA should support those efforts

Discussion Regarding the American Institute of Certified Public Accountants January 2017 Peer Review Administration White Paper on the Evolution of Peer Review Page 4 of 4

undertaken to enhance the effectiveness, consistency, and quality of peer reviews. The PROC determined that no further action or comment letter is necessary. CBA Executive Officer, Patti Bowers, attended the NASBA 35th Annual Conference for Executive Directors and Board Staff on March 14-16, 2017. At the Conference, NASBA presented a PowerPoint presentation which provided an overview of what to expect with the proposed changes to the peer review administration, identified current proposals, plans for engagements with state boards, updates to the Facilitated State Board Access, proposed timeline, and report from the NASBA Compliance Assurance Committee (Attachment 6).

At the March 23-24, 2017 CBA Meeting, Jeff De Lyser, PROC Chair, presented the PROCs findings and concluded that the CBA agrees in the proposed efforts to enhance the effectiveness, consistency, and quality of peer reviews. In light of the additional information identified at the NASBA Executive Conference on March 14-16, 2017, it was determined that the PROC should revisit the AICPAs paper on the Peer Review Administration along with the comment letters from NASBA and other state societies to determine if there is any additional information that may impact the CBAs Peer Review Program.

Fiscal/Economic Impact Considerations There are no fiscal/economic impact considerations.

Recommendation Staff do not have a recommendation on this agenda item.

Attachments 1. American Institute Certified Public Accountants Paper Entitled, Proposed Evolution

of Peer Review Administration, Revised January 2017. 2. American Institute Certified Public Accountants Paper Entitled, Proposed Evolution

of Peer Review Administration A Supplemental Discussion Paper Seeking Input from State Boards of Accountancy, Issued July 18, 2016

3. A California Board of Accountancy Letter to AICPA Regarding Proposed Evolution of Peer Review Administration, A Supplemental Discussion Paper Seeking Input From State Boards of Accountancy, Released July 18, 2016

4. National Association of State Boards of Accountancys Comment Letter to the American Institute Certified Public Accountants Paper Entitled, Proposed Evolution of Peer Review Administration, dated October 21, 2016

5. Comment Letters from Multiple State Societies In Response to the American Institute Certified Public Accountants Paper Entitled, Proposed Evolution of Peer Review Administration, Issued July 18, 2016

6. National Association of State Boards of Accountancys Peer Review Administration PowerPoint Presentation

Proposed Evolution of Peer Review Administration Revised January 2017

A discussion paper seeking input from state CPA societies and state boards of accountancy

Released for comment: January 4, 2017 Feedback requested: June 30, 2017

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Background

In February 2016, the American Institute of CPAs (AICPA) released a discussion paper to state CPA society (society) CEOs to solicit input on the evolution of peer review administration of the AICPA Peer Review Program (Program), with a companion paper sent to state boards of accountancy (boards) in July. The evolution of peer review administration is part of the AICPAs Enhancing Audit Quality (EAQ) initiative, with the objective to ultimately improve audit performance by increasing consistency, efficiency and effectiveness of Program administration.

The February paper proposed a model for a peer review administering entity (AE) of the future, specifying various criteria, including a required number of AEs, specific staffing requirements/qualifications, structural requirements for Peer Review Committees (Committees) and Report Acceptance Bodies (RABs) and the administration of a minimum of 1,000 peer reviews annually. The model demonstrated one potential way in which the consistency, efficiency and effectiveness in the administration of peer review could be increased, resulting in improved audit performance by practitioners.

The discussion paper and its companion paper to the boards generated significant discussion and response, including formal comment letters from 30 societies and 25 boards. The overwhelming majority of respondents agreed inconsistencies exist among AEs and the administration model needs to change. Most respondents agreed a reduction in the number of AEs would improve consistency.

In addition, stakeholders submitted ideas on how best to achieve the stated objective including several alternatives to the model. A group of society staff leadership and AICPA staff carefully considered these alternatives, and agreed that a model using modified staffing requirements/qualifications and specific performance benchmarks could most effectively achieve the objective. In addition, the Planning Task Force of the AICPAs Peer Review Board (PRB) provided additional input while concurring with the approach as a whole. Based on this feedback, the model has been revised to eliminate the required number of AEs, the requirement to administer a minimum of 1,000 reviews annually and many of the AEstaffing requirements.

Proposed Benchmark Model

The most common suggestion for the evolution of peer review administration was to allow existing, effective AEs that operate in full accordance with Program Standards and guidance, to continue administering the Program, without consideration given to the number of peer reviews administered, and to discontinue administration by poor performing AEs. Many respondents indicated they believed their AE was operating effectively because they were unaware of any evidence to the contrary. Accordingly, the model proposed in this paper requires AEs to meet specific benchmarks, diligently monitored by the AICPA, and increases transparency of AE performance.

Under this model, AEs that choose to continue administering peer reviews must meet specific benchmarks, which include qualitative, objective and measurable criteria. AEs will be evaluated based upon whether they consistently meet these benchmarks. AE performance will be made transparent through new reporting requirements to various stakeholders, such as society CEOs and boards, as appropriate. If this approach is undertaken, the specific benchmarks illustrated in this paper are subject to changes and approval by the PRB, and may be modified over time due to advances in technology and other factors.

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Inconsistencies in administrative processes and report acceptance have been identified by PRB Oversight Task Force (OTF) members and AICPA staff through RAB observations, AE oversight visits and other processes. These inconsistencies, though communicated only to the AE in the past, resulted in peer reviews being administered untimely and with results not in compliance with the Program. The proposed benchmarks have been developed by identifying how to: Minimize the inconsistencies Increase the probability that individuals with the appropriate knowledge, experience and

skepticism perform and give adequate consideration to technical reviews and the RAB process, and

Optimize the peer review process so firms can meet their licensing requirements efficiently

Two Important Criteria Retained and Modified

Two key criteria from the original proposed model are included, though slightly modified, in this revised proposal related to staffing and Technical Reviewer requirements.

1) Staffing: Ultimately, the society CEO is responsible for determining the necessary staffing and hiring appropriately qualified individuals.

Though the primary focus of the proposed model is the achievement of identified benchmarks, each AE will be required to have at least one CPA employed on staff, who is actively engaged, knowledgeable about the Program Standards and administrative requirements and processes, and has the authority and sufficient knowledge to identify and correct inadequate performance of an administrator or technical reviewer. If the AE administers for more than one state, the CPA staff member must be employed full-time. This individual should Be fully committed to the objectives of the Program and its administration and

have the moral courage to challenge Committees/RABs, when necessary Conduct monitoring procedures and present results to the society CEO Be responsible for day to day operations of the Program, which allows continuity

and a backup plan

2) Technical Reviewer Requirements: Based on stakeholder feedback the requirement for a full-time technical reviewer to be employed on staff has been removed. Additionally, the requirement that all working papers be evaluated as a part of the technical review has been removed. However, there will be a change in process in that administrators will make all peer review working papers available to the technical reviewer who will be required to take a risk-based approach in determining which working papers should be evaluated during the technical review. In addition, the requirement for the technical reviewer to be present during RAB meetings has been retained.

Failure to Meet Benchmarks

If performance benchmarks are not met, a society (or organization) will lose its ability to be an AE. The OTF and AICPA staff will monitor AE compliance through reports generated from the new peer review software program launching in 2017, Peer Review Integrated Management Application (PRIMA), observations of Committee and RAB meetings and AE oversight visits. If an AE fails to meet the benchmarks and appropriate, timely remediation is not achieved, the

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PRB will rescind the AEs ability to administer the Program. Fair procedures will be developed and followed to determine the appropriate remediation and, if necessary, termination.

Benchmarks

Benchmarks fall into three categories: administrator, technical reviewer and Committee/RAB. AEs will be required to develop policies and procedures to address how the AE will comply with the benchmarks. These policies and procedures will become part of each AEs annual Plan of Administration (POA). The POA is a document outlining operational details as to how the AE will implement the Program under Program Standards and is subject to annual approval by the PRB.

In addition, each AE will be required to develop and disclose in its POA its policies and procedures designed to mitigate the familiarity threat that exists among Committees/RABs, technical reviewers, peer reviewers, and firms subject to review, based on the AEs particular circumstances. Such procedures may include one or more of the following (not all inclusive): Redacting identifying information about firm and/or peer reviewers from documents

presented to RAB Arranging for the acceptance of its committee members peer reviews by another AE Arranging for the acceptance of its high-volume reviewers reviews by another AE Arranging for RAB members or specialists from other states to participate in RABs Engaging qualified individuals from another state to perform all technical reviews

In addition to the policies and procedures designed to mitigate the familiarity threat developed by each AE, all committee and RAB members will annually be required to: (1) participate in guided discussion which will emphasize the importance of maintaining objectivity and the appropriate level of skepticism, and (2) sign confirmations indicating their agreement to comply with Program Standards and maintain objectivity and an appropriate level of skepticism.

For each AE, the applicable society CEO(s) will be accountable for the peer review administrative process under his/her organizations responsibility. Accordingly, the CEO will be responsible for: Determining the necessary staffing Hiring appropriately qualified individuals Monitoring compliance with the benchmarks, and Signing the POA, agreeing to the responsibilities outlined above

See Exhibit 1 for descriptions of proposed benchmarks.

Benchmark Violations and Fair Procedures

If an AE fails to meet the required benchmarks, fair procedures will be followed to determine the appropriate remediation, or depending on the significance of the benchmarks not achieved, termination. The fair procedures developed will provide the AE an opportunity to remedy the situation(s) that created the violation(s), with disqualification as an AE resulting only from a failure to remediate to acceptable levels of performance. When remediation is required, the individual within the AE responsible for the Program should immediately take required actions, and the society CEO should oversee the remediation.

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Violations will fall into one of two categories: egregious and non-egregious, with both types of violations resulting in required remediation and appropriate transparency to stakeholders. A pattern of non-egregious violations will result in additional oversight, with failure to remediate causing the AE to move into probation. Egregious violations will cause immediate probation, with the AE incurring the cost of external oversight during remediation.

Exhibit 2 provides a flow chart and an illustrated example of fair procedures. The fair procedures will be fully developed and shared with all stakeholders, including the costs to the AE for remediation and probationary activities.

As previously indicated, the specific benchmarks illustrated in this paper are subject to changes and approval by the PRB, including the determination of which benchmark violations are considered egregious. Below are examples of proposed egregious benchmark violations which will cause an AE to move into probation: Late submission of the Annual POA (or not including all required information) by due

date (note that the PRB is currently considering revising the due date of the Annual POA to a time where submission of complete information is reasonably achievable)

Not completing the required annual minimum number of oversights by the due date (note that, similar to the consideration noted above for the Annual POA, the PRB is currently considering the date by which all oversights must be completed.)

Not addressing reviewer performance issues timely Technical reviewer and Committee/RAB members not applying appropriate level of

objectivity and skepticism (familiarity threat) Receiving repeat comments in a RAB observation report from the immediate preceding

report Releasing confidential peer review information to an external party without written

permission from firm Sending over 15% of required communications late RABs accepting reviews without the presence of members who have appropriate

experience/expertise or a quorum Not performing administrative oversight RAB consistently deferring or delaying over 10% of reviews Not engaging/using technical reviewers who possess appropriate experience, training or

expertise Technical reviewers not present at RAB meetings Not structuring and scheduling RAB meetings appropriately Not responding timely to requests from the OTF or AICPA staff

State Board Oversight

While this paper does not propose a separate set of board oversight benchmarks, such oversight will continue to be a critical component of the Programs administration. The proposed model will not be effective without external oversight such as that performed by board-appointed Peer Review Oversight Committees (PROCs). We will continue to work closely with the National Association of State Boards of Accountancy (NASBA) and boards to support an effective PROC process. We will also continue our collaboration with NASBAs Compliance Assurance Committee (CAC) to discuss and develop appropriate oversight procedures.

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In addition, we will create a panel of board executive directors as an additional channel of input for administrative matters. Through this model, we will provide an additional avenue of discussion regarding AE administration and other peer review matters.

Stakeholder Feedback Requested by June 30, 2017

Feedback is integral to the evolution of peer review administration. The AICPA is requesting your feedback of this proposed model and the benchmark criteria for AEs of the future. All input will be considered and will shape the final plan. The intent is to communicate a final plan, along with a transition process, by August 31, 2017.

Please consider the following questions when formulating your response. Considering the benchmark criteria presented, what changes do you believe will best

increase consistency and audit quality in the peer review administration process? What suggestions do you have to help mitigate familiarity threats to the process? Are there proposals within this paper that are not feasible? If so, what suggestions do

you have for otherwise meeting the objective of increasing consistency, efficiency and effectiveness of Program administration?

Considering the benchmark criteria presented, would any new criteria be unreasonable to implement by May 1, 2018?

Are there additional benchmark criteria that should be included? Are there aspects discussed within the paper that need further clarification?

If you have concerns about aspects of the proposed plan, please share alternative suggestions for meeting the quality initiative.

Comments and responses should be sent to Beth Thoresen, Director Peer Review Operations, AICPA Peer Review Program, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110 or prsupport@aicpa.org, and are requested by June 30, 2017.

Thank you in advance for your thoughtful consideration of the issues facing Peer Review administration, and your commitment to enhancing audit quality throughout the profession.

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mailto:prsupport@aicpa.org?subject=Evolution%20Response

Exhibit 1 Benchmarks

The following are proposed performance benchmarks for which each AE will be held accountable. All benchmarks in this paper are illustrative and are subject to modification and approval by the PRB. The OTF and AICPA staff will monitor compliance utilizing PRIMA, observations of Committee and RAB meetings and AE oversight visits.

Some benchmarks may require changes to guidance and others may be revised as PRIMA is implemented during 2017. Current benchmarks will be monitored upon approval of the concept. Certain benchmarks are currently implied and thus expected to be currently met, and guidance will be changed such that they will be explicitly required. Benchmarks that are not currently implied or required will be phased in, with all benchmarks effective by May 1, 2018.

Administrator Benchmarks:

Current Requirements Enter committee decision for reviews when acceptance has been delayed or

deferred and send letters within two weeks of RAB meetings Submit complete annual POA by due date, including completion of all

requirements Select appropriate reviews for oversight based on written criteria in the policies

and procedures, which considers risks associated with both the reviewer and the firm

Ensure the minimum number of oversights and the related criteria are met and performed throughout the year

Send overdue letters and other communications when appropriate as required by guidance

Make appropriate decisions on exceptions (e.g. extensions, team members, off-site reviews, etc.) and maintain support for exceptions

Perform the reviewer resume verification process timely and in accordance with the Oversight Handbook

Follow the documentation retention criteria policy established within Interpretation 25-1

Implied Requirements Comply with confidentiality requirements of the Program and the boards for the

states the AE administers; this includes: o Establish internal confidentiality procedures o Communicate the policies and procedures to all parties involved in the

peer review administration process o Observe that the policies and procedures are followed

Complete administration checklist and record working papers received (within four business days of receipt)

Fully implement recommendations from RAB observations in a timely manner upon receipt of the report

Fully implement recommendations from RAB observations such that no comments are repeated in subsequent observations

Provide RAB materials electronically to RAB members one week in advance of RAB meetings

Respond timely to requests from the OTF or AICPA staff

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New Requirements Weekly investigate reviews for which review team composition cant be approved Record committee decisions timely in PRIMA after RAB meetings for reviews that

are accepted which will result in documents being uploaded to FSBA Address the familiarity threat for Committee and RAB composition within the

POA

Technical Reviewer Benchmarks:

Current Requirements Perform the technical review timely and in accordance with the RAB Handbook

requirements (including applying appropriate levels of objectivity and skepticism) Recommend reviews or engagements for oversight when appropriate

Implied Requirements Limit reviews with open items and missing relevant information from being

included in the RAB package unless RAB consultation necessary (overall over time, an AE should have less than 10% of its reviews delayed or deferred to another meeting)

Fully implement recommendations from RAB observations in a timely manner upon receipt of the report

Fully implement recommendations from RAB observations such that no comments are repeated in subsequent observations

Be familiar with guidance issued by the PRB and the board licensure laws for the states in which the AEs administer peer reviews

Propose due date for corrective actions or implementation plans after discussing feasibility with the firm in advance of RAB meeting to be included in the RAB materials

Respond timely to requests from the OTF or AICPA staff

New Requirements Prepare reviewer feedback forms and letters in advance of RAB meeting to be

included in the RAB materials Obtain must-select training to perform technical reviews of peer reviews that

have engagements from must-select industries Be present during RAB meetings in which his/her reviews are presented to

answer RAB member questions to avoid deferrals or delays Be CPAs Thoroughly prepare peer reviews for RAB meetings to minimize the number of

reviews that are deferred or delayed accepted subject to missing information

Committee/RAB Benchmarks:

Current Requirements Conduct RAB meetings with sufficient frequency to meet 120-day rule for

timeliness of presentation of reviews (60-day rule for engagement reviews with certain criteria)1

1 This model does not propose a minimum number of RAB meetings per year.

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Structure each meetings RAB member composition to include members with relevant industry experience (regarding must-select engagements)

Ensure each review has a quorum of RAB members to vote on it in accordance with the RAB Handbook

Be familiar with guidance issued by the PRB Meet qualifications as established in the RAB Handbook Read materials prior to the RAB meeting and come prepared to discuss agenda

items Discuss peer reviews and do not overly rely on the technical reviewer (including

applying appropriate levels of objectivity and skepticism) Assign corrective actions and implementation plans in the appropriate situations

with due dates that are feasible and will benefit the firm Issue timely the appropriate level of reviewer feedback that the situation dictates Shepherd reviews through the completion process timely, including generally not

waiving or extending corrective actions and implementation plans (exception hardships)

Perform oversights on firms and reviewers timely in accordance with the Oversight Handbook and each AEs own written policies and procedures

Annually evaluate qualifications and competencies of technical reviewer(s) Perform administrative oversight in accordance with the Oversight Handbook

Implied Requirements Establish RAB meeting length so that the entire meeting is productive; the length

is appropriate to adequately discuss each peer review given its complexity (suggestion: conference calls should not be scheduled for more than two hours)

Fully implement recommendations from RAB observations in a timely manner upon receipt of the report

Fully implement recommendations from RAB observations such that no comments are repeated in subsequent observations

Respond timely to requests from the OTF or AICPA staff

New Requirements Schedule RAB meetings no later than two weeks in advance Establish a written RAB rotation policy regarding RAB composition within the

POA Ensure an oversight plan is approved by the Committee and is in place by a

required date Present pertinent facts on each review (not on the consent agenda) prior to

discussion and voting All RAB members will formally attest to having read all materials prior to RAB

meeting and will maintain objectivity and a professionally skeptical attitude when considering reviews presented for acceptance.

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Exhibit 2 Fair Procedures

If an AE fails to meet the established benchmarks, fair procedures will be followed. The anticipated process will include multiple steps, including required remediation and, if remediation is not successful, termination of the AEs qualification to administer the Program.

Process Flow:

Steps in Fair Procedures:

Step 1: Increased monitoring performed remotely by AICPA staff. Determination to move to Step 1 made by AICPA staff, with periodic reporting of activity to the OTF.

Accelerated RAB observations to include all reviews presented to RAB. (Second RAB observation to occur no sooner than 30 days after the first.) o Procedures include reviewing RAB materials, observing the RAB meeting and

preparing the report. Monitor status of open reviews monthly during this period.

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Step 2: Probation increased monitoring performed by AICPA staff and/or OTF member at AEs expense, which may include on-site oversight at an appropriate hourly rate and reimbursement of travel expenses. Determination to move to Step 2 made by OTF.

Step 2 Example: Below are activities that may occur with increased monitoring during the probation period. Multiple activities, including repetitions, may be required, and could cost the AE anywhere from $10,000 to $40,000. Note, however, that actual hours, rates and resulting costs may vary greatly. RAB meeting observation procedures include reviewing materials, observing the

meeting and preparing a report to the OTF (time estimate 5 hours) Test AEs compliance with administrative procedures (time estimate 4 hours) Committee meeting observation (time estimate 4 hours) Travel to AE for in-person observation (time estimate 4 to 10 hours)

Step 3: Referral to hearing panel to determine whether:

The AEs qualification to administer the Program will be terminated (with its

administration transitioned to another AE), or

The AE will be allowed to continue to remediate (i.e., return to Step 2).

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Peer Review Program

A supplemental discussion paper seeking input from State Boards of Accountancy.

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Background

During a strategic planning session held in October 2010, the AICPA Peer Review Board (PRB) focused on enhancements and improvements in five key areas of the AICPA Peer Review Program (Program). One key area was improving the peer review administrative process. The PRB observed that the existing processes remained largely the same since the inception of the Program in 1985, despite dramatic changes in the environment and in technology. Historically administering entities (AEs) have administered the Program on behalf of the AICPA. Through annual Plans of Administration (POAs), AEs agree to:

Administer the Program in compliance with the AICPA Standards for Performing and Reporting on Peer Reviews (Standards) and other guidance established by the PRB

Ensure staff and all others involved in the Program comply with the Standards and other guidance established by the PRB

Appoint a peer review committee to oversee the administration, acceptance and completion of peer reviews to ensure the Program is performed in accordance with the Standards and other guidance established by the PRB

Employ staff who meet the requirements defined in the Standards to perform technical reviews on all peer reviews administered

Based on surveys and focus groups conducted in 2011 and 2012 with enrolled firms, peer reviewers and AEs, stakeholder feedback indicated various opportunities to improve the administration of the Program, including consistency and quality of the:

Report Acceptance Body (RAB) process, Resume verification process, Reviewer qualification on must-select engagements, Firm reenrollment/reinstatement, Firm change of venue, Administrative fee structures, and Managerial skills needed to run a complex technology driven process.

Consideration of this feedback led the PRB to conclude that fewer entities administering the program would result in greater consistency in peer reviews, and hence, greater quality. Further, the PRB noted the importance of consistent peer review administration and acceptance processes across AEs as states move to adopt firm mobility, as the public is best served when peer reviews are consistently administered in accordance with the Standards, regardless of where the peer review takes place.

The PRBs work was temporarily suspended, pending the work of the AICPA Board of Directors authorized Practice Monitoring of the Future (PMoF) initiative. The initiative conceptualizes a future technology-driven system, much different from todays peer review process. Upon the realization that PMoF will take several years and the input of many stakeholders to achieve actualization, the PRB resumed its focus on improvements to the current Program.

In 2015, a group of state CPA society (society) staff leaders was engaged to advise and assist in designing a potential new administration model (referred to as the Evolution of Peer Review

AICPA Proposed Evolution of Peer Review Administration Supplemental Discussion Paper Page 1

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Administration). The group offered a variety of suggestions that shaped the model developed by AICPA staff, and though they did not offer consensus on proposed criteria for AEs they all agreed a reduction in the number of AEs was needed to ensure consistency.

The proposed model was presented to the society CEOs (the Program administrators) in a discussion paper on February 22, 2016, as a first step in gathering feedback from the Programs key stakeholders. The paper primarily focused on issues directly impacting the societies that administer the Program, including staffing, Peer Review Committees and RABs. The objective was to first gather feedback on the proposal from societies, then solicit input from state boards of accountancy (boards) after consideration of initial feedback.

The proposed model was next introduced to board executive directors at the National Association of State Boards of Accountancy (NASBA) Executive Directors conference in March 2016, with the Evolution paper distributed more broadly to boards shortly thereafter. Further discussions were held at the June 2016 NASBA Regional Meetings.

This follow-up discussion paper is being provided for further consideration and feedback by boards. It includes responses to initial comments as well as thoughts on additional issues of importance to boards, including oversight of the Program and access to peer review information.

Process Improvement

The goal of the proposed model is to enhance quality by reducing inconsistencies in peer review administration and acceptance, enhance objectivity and professional skepticism in the report acceptance process and improve timeliness of review acceptance.

All AEs are required to administer the Program in accordance with the Standards and other guidance established by the PRB. Any issues identified during the AICPAs annual administrative oversight process are noted in the AE oversight report and are required to be rectified for the state to remain an AE. However, many inconsistencies exist with the way the Program guidance is applied. Improving consistency is important for quality and supports the professions overall efforts to increase mobility in the profession.

Achieving Greater Consistency

History has demonstrated that it is difficult to achieve consistency among 40 or more AEs, and consistency is critical. Firms and their regulators should expect the same peer review results regardless of where the peer review is conducted and administered. While some lower volume AEs excel at Program administration, AEs that administer a larger volume of reviews generally have more effective and consistent administrative processes. Such AEs have important attributes, including full-time staff dedicated to peer review. Although staffing specifics vary, each has at least one full-time administrator, manager and technical reviewer with appropriate qualifications. Further, these AEs have dedicated management focusing exclusively on peer review. As the profession and the assurance services it performs continues to evolve and become more complex, the Program continues to evolve with it, becoming increasingly complex and making it more challenging for staff to remain fully versed on the Program if they are also focused on non-peer review related responsibilities. Throughout the rapid changes in the Program, dependency on technology for all steps of the process, including administration, has

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increased (and will continue to increase). The ability to adapt and work effectively with changing technology has been considered critical in determining the qualifications of staff necessary to perform these roles.

A high-level summary of the duties AE staff perform is outlined below.

Administrator

Confirm all enrolled firms schedule reviews in accordance with Standards and board requirements and assist firms to resolve scheduling errors or issues

Work with peer reviewers to coordinate the submission and processing of peer review documents to the AE to ensure that all required documentation is received and work papers are accessible for Technical Reviewers

Maintain Facilitated State Board Access (FSBA) records in a timely manner

Manager

Develop processes and procedures for the scheduling and processing of reviews, maintain information on the status of reviews and monitor compliance with deadlines

Coordinate the review of working papers with Technical Reviewers, and coordinate and document activities of the RAB

Technical Reviewer

Perform full work paper reviews before the presentation of a peer review to the RAB Work closely with peer reviewers and public accounting firms to identify and resolve

questions and issues prior to RAB presentation Assist the RAB member responsible for presenting the review by providing additional

detailed information as necessary

AEs that administer a larger volume of reviews also have a greater pool of available volunteer committee and RAB members with the expertise needed to accurately assess high risk reviews. Coupled with a proportionately lower number of technical reviewers (since full-time technical reviewers are employed), these AEs are able to have more frequent RAB meetings, resulting in a more efficient and consistent process, and are more easily able to minimize the threat of being overly familiar with the reviewers whose reports they consider.

Noted Inconsistencies

The nature of some of the inconsistencies across the current structure include how the following are identified and addressed.

Peer review report ratings inconsistency in identifying and/or requiring a modification to a report (e.g., from pass to pass with deficiency or fail)

Corrective actions and implementation plans inconsistently imposing appropriate corrective action or implementation plans on the reviewed firm

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Reviewer performance matters (including feedback) inconsistency in appropriately addressing reviewer performance issues and reluctance to eliminate reviewer from the pool when warranted

Firms with consecutive non-pass reports inconsistencies among AEs referring such firms to the PRB for non-cooperation

Determination of pervasiveness (and impact on the firms as a whole) inconsistencies in requiring expansion of scope or study when problems encountered in a review

Determination of systemic cause inconsistencies in requiring peer reviewer to determine (and opine on) systemic cause

Inconsistencies in implementation of and compliance with new and existing Standards Inconsistent treatment of documentation issues verbal acceptance that audit work was

completed where no or little documentation exists Engagement selection scope and reasonable cross-section inconsistency in

challenging the reviewer on the number or scope of engagements selected Inconsistent timeliness of presentation to RABs, following-up with overdue reviews and

firms with corrective action general timeliness due to staffing priorities Matter for Further Consideration (MFC) and Finding for Further Consideration (FFC)

inconsistency in properly elevating a matter to a finding where remediation should be monitored and implementation plans required

Accuracy of information input into peer review database (PRISM)

Initial Proposed Criteria for AEs of the Future

To help improve audit quality, a peer review process is needed that appropriately and consistently detects and corrects issues by providing feedback in a timely manner. This means that peer review staff must be thoroughly versed on the rapidly changing Standards and processes, and the pool of volunteer participants must be large enough to support frequent RAB meetings and provide the expertise needed for appropriate review and acceptance of reviews.

Accordingly, the following criteria were initially proposed for AEs to be most effective and to continue to administer the Program. The criteria are based upon discussions with society leaders, meetings with AEs and the results of AE and RAB oversights. The criteria have been proposed as a straw-man to begin the discussion and are expected to change based on stakeholder feedback received.

Consistent AE peer review management, employee and consultant structure, qualifications and responsibilities

Effective performance of Peer Review Committee and RABs Administration of at least 1,000 peer reviews annually to improve efficiencies

Oversight

The PRB has always recognized and supported the value of oversight to boards and is an active partner with NASBA in promoting the board Peer Review Oversight Committee (PROC) process.

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By way of this paper and other means, the AICPA expresses its understanding that proposed changes in peer review administration will have an impact on the current model for board oversight of the program and may necessitate changes by boards of the current PROC process. The AICPA, and members of the PRB and its Oversight Task Force, are cooperating with NASBAs Compliance Assurance Committee and NASBA leadership to assist boards in considering and vetting new potential models for board oversight based on the proposed new administration model and will continue to work with boards to ensure an effective board oversight process is implemented.

Initial Feedback on Discussion Paper:

Provided below is clarification for questions and commentary received on a number of issues.

Continuing as AEs Many states currently and successfully have their states peer reviews administered by an AE outside of their state. Additionally, prior to the release of the discussion paper, some societies had already been considering transitioning out of Program administration due to the exit of an employee or other factors, and had begun conversations with other states independent of the discussion paper proposed model. As a result of the discussion paper, societies have advised us that they are considering continuing to be an AE, transitioning administration to another state (or AICPA) or are unsure. A process for states to transition to another state (or AICPA) will be developed once final criteria and structure are determined. Societies have been advised to engage in discussions with their respective boards regarding their future vision for peer review administration.

Cost of Peer Review The reduction in the number of AEs should not, in and of itself, cause a rise in administrative fees. However, the cost of peer review for firms will increase moderately with or without the Evolution of Administration, as a result of enhancements to the program designed to better detect and correct deficiencies. Peer Review administrative fees have always been expected to be based on cost recovery, and this will continue to be the expectation.

Peer Reviewer Pool The current active reviewer pool is larger than ever before. In addition, many reviewers already perform reviews for firms administered in multiple states. Some reviewers may choose to discontinue reviewing due to changes in the Program, but many qualified reviewers are available and ready to handle reviews if some leave the pool. The AICPA remains committed to monitoring and taking action to ensure an appropriate pool of reviewers remains available.

Performance by a Peer The Evolution of Administration does not change the review process as articulated in the Standards, including having peers performing the peer review, considering and accepting the review and determining the appropriate remedial action, when necessary. Some states have statutes and other state-specific considerations, and future guidelines will address this concern.

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Proposed Number of AEs (8-10) and Administering 1,000 Annual Reviews The straw-man suggested in the initial discussion paper is a proposal, as are the other criteria and timeline. None of the proposed criteria including the total number of AEs or annual reviews are fixed. It is possible the final number of AEs and the number of annual reviews administered will be different, if stated at all. In addition, though the discussion paper indicates the AICPA will develop a new national AE to provide an additional option for societies that choose not to administer the program in their state, the AICPA is encouraging societies to look first to other societies to share administration.

RABs and RAB Members

Inconsistencies among RABs Achieving consistency among 40+ AEs has been difficult and costly. PRB oversights have noted inconsistencies in the RAB process from state to state and peer reviewers who perform reviews in multiple states have voiced concerns about this as well. Firms and regulators should be able to expect the same review results regardless of the state in which they are based.

Commitment required of RAB Members The commitment effort for individual volunteers is not expected to change from the current program. The 50 hours per year estimate was developed by AICPA staff based on the time anticipated volunteers would need to prepare for and participate in RAB meetings. Though the proposed model articulates more frequent RAB meetings than are currently held by lower-volume AEs to better assist firms in meeting state licensing requirements, the increased frequency will be possible due to the larger number of volunteers participating in the consolidated AE.

Pool of RAB Members The majority of the current volunteers will continue to play a significant role in the new RAB structure. Society CEOs are already having discussions with existing peer review committees, indicating their value and need for their continued service. In addition, as they do now, states that administer peer review and those that do not will be involved in the active recruitment of both peer reviewers and volunteers.

Timeline The original proposed model suggested a timeline for implementation of the new model. However, initial feedback has clearly indicated that more time will be needed for the proposed changes, and it is now assumed the previously proposed implementation dates will be pushed back.

Board Involvem