We want to help you make a well-informed decision when you choose the right auditor for your organization.
An auditor is important to your company because they tell your financial story. For this role, you should hire an auditor who enjoys a solid reputation for telling stories accurately. Auditing firms earn their reputation through the peer review process.
An Auditor’s Reputation
The American Institute of CPAs (AICPA) requires every CPA firm that performs audits, reviews and/or compilations be inspected every three years. This inspection takes the form of a peer review. Another qualified accounting firm conducts the peer review while the AICPA monitors the whole process. In this way, peer reviews make up an accounting firm’s reputation.
The peer review process helps to ensure CPA firms perform quality services and comply with professional standards. AICPA firms are required to report their peer review scores on the AICPA website, which means you can search for any CPA firm’s reputation before you sign an engagement letter with them.
Firms can receive one of three scores from a peer review: Pass, Pass with Deficiencies, or Fail.
Auditors who receive a passing grade are those with reasonable systems of quality control and compliance within the auditing and accounting process. They also comply with relevant professional standards for reporting in all material respects.
You can trust accounting firms with a strong “Pass” record to perform your audit accurately.
Pass with Deficiencies
Though it may sound like cause for alarm, this middle score may be nothing to worry about. Simply put, the reviewing firm found enough evidence of solid quality control to give the firm a passing grade, but not without exceptions.
These exceptions (called Deficiencies) are inconsistencies with the firm’s internal system of quality control that could affect its ability to perform or report in compliance with professional standards.
Deficiencies can be serious threats to a firm’s reliability or largely irrelevant, so it’s important to read the peer review report thoroughly to understand the nature of the problem. Firms with these scores can be trustworthy or dubious, so proceed with caution.
Yes, it’s as bad as it looks. Auditors that receive failing grades on peer review reports do not have suitable quality control systems in place, or failed to conform to professional standards in all material aspects. If an auditor fails their peer review, the financial statements they issued to their clients could be invalid.
You can still read up on why the firm failed in its peer review report, but suffice to say that this score should eliminate the firm from consideration.
Even if you’ve been engaged with a firm for many years, it never hurts to ask for their most recent peer review. We’ve seen cases of organizations finding out that since they started working with a CPA firm, the firm failed their peer review and never notified the organization.
This kind of situation puts the organization at risk. Even though the CPA firm provides the audited financial statements, it’s ultimately the organization’s responsibility to ensure the information is accurate and complies with regulations and professional standards.
How To Check Your Auditor’s Peer Review Report
On the front end, you can request a CPA firm’s most recent peer review report as a part of the request for proposal (RFP) process. This is one way to make sure the CPA firm performs quality work, and it also lets the firm know you’re doing due diligence.
If your CPA firm receives a result other than Pass, ask to see the letter of comments and their response (if they made one). At the very least, they should explain how many financial statements they prepare on a yearly basis, what CPE their auditors have completed, and the reason they received anything but a passing grade. If they refuse to answer these questions, you may not want to consider hiring them.
Search the AICPA Peer Review Database
The AICPA keeps reviews, reports, and responses for every one of its member’s most recent peer review in an online database. To find your auditor’s peer review documents:
- In the Search Criteria, fill in at least a partial name of firm
- Select the state from the drop-down menu
- Do not check any of the boxes listed
- Click Submit
Try it out by looking up our firm: type in “Donovan” and select Indiana.
If you have questions or need help understanding the language in a firm’s peer review report, please feel free to contact us. We are here to serve you!
Want to learn more? Check out our blog series on how to choose an auditor.