A brief primer on key provisions of the Mandatory Quality Review Program

BY MARK RACHLEFF, Peer Review Technical Manager
and ERNEST MARKEZIN, Director, Quality Enhancement

Effective date:
The New York State Education Law (Article 149, Section 7410) and New York State Education Department Regulations (collectively, the “Mandatory Quality Review law” or “MQR law”) are effective January 1, 2012.

Basic rules of the law:

1. The Mandatory Quality Review law requires, among other things, that firms, as a condition for firm registration (or reregistration), undergo a quality review of their attest services every 3 years;
2. Sole proprietorships and other “small firms” may qualify for exemption from the Mandatory Quality Review law, depending upon the number of CPAs in the firm and the scope of such firm’s attest practice. (See discussion of the small firm exemption below.);
3. A firm subject to the MQR law must provide the New York State Education Department (SED) with a copy of the report for an acceptable quality review conducted within the prior three years, each time the firm registers with the Department, for registration periods that begin on or after January 1, 2012.

Quality Review:
The MQR law defines a quality review report as a formal report issued by a reviewer and accepted by a sponsoring organization.

Sponsoring Organization:
Sponsoring organization means an entity located in New York State approved by the SED to administer and oversee quality reviews. The NYSSCPA is currently being reviewed for approval as a sponsoring organization.

Attest Services:

1. Audits under generally accepted auditing standards developed by a nationally recognized accountancy organization (such as the AICPA), federal governmental agency (such as the GAO) and other recognized rule makers specified in the Regulations;
2. Review of a financial statement performed in accordance with rules developed by the organizations as cited in 1. above;
3. Examinations performed in accordance with attestation standards developed by the organizations referred to in 1. above.

Observation:
Unlike the AICPA peer review program definition, the definition of attest services for MQR purposes excludes compilations from its scope.

Small firm exemption from the MQR law:
Sole proprietorship firms or firms with two or fewer accounting professionals, subject to the exception described immediately below, are not required to undergo a quality review but may voluntarily do so.

Exception:
The small firm exemption is not available to firms that perform attest services for state or municipal governments or perform attest services pursuant to New York state law. Such firms, regardless of the fact they are either sole proprietorships or a firm of two or fewer accounting professionals (see below), are required to undergo a quality review.

Accounting Professional:
Accounting professional means a certified public accountant or a public accountant, as defined in the Education Law at Sections 7401-a(2) and a(6), respectively.

Acceptable Quality Review:
The SED regulations, in defining Standards for Quality Reviews, adopts a two-pronged test:
1) The review must be performed pursuant to standards for performing and reporting on peer reviews of a recognized national accounting association such as the AICPA; and 2) the review includes tests to determine whether members of the firm supervising attest services or signing or authorizing someone to sign reports on attest services satisfy the competency standards of the Board of Regents (Section 29.10-(a)(13). A peer review satisfying both tests constitutes an acceptable peer review program for meeting the SED triennial quality review requirement defined in Sections 70.10-(i)1 and 2.

Competency Standards of the Board of Regents:
Any partner, member, shareholder or sole proprietor of the firm who supervises attest services or signs or authorizes someone to sign reports on attest services or any licensed employee who is authorized to sign reports on attest engagements on behalf of the firm must satisfy the competency requirements set forth below:

1. Experience:
   
   • a. Have at least 1,000 hours of experience within five years providing attest services or reporting on financial statements through employment in private industry, government, public practice or an educational institution satisfactory to the SED; or
   • Be employed by a firm registered with the SED that has received a rating of Pass or Pass with Deficiency on its most recent peer review;
2. CPE: Complete at least 40 hours of CPE in accounting, auditing or attestation during the prior three years or in the calendar year the services were provided;
3. Professional standards: Maintain a level of education, experience and professional conduct required by generally accepted professional standards defined in Section 29.10-(b)(7)of the Rules of the Board of Regents.

Types of peer reviews performed under AICPA standards:
There are two types of peer reviews: 1) a system review and 2) an engagement review. The type of review required of a firm is based on the levels of service performed by the firm during the peer review period.

1. Firms that perform engagements under Statements on Auditing Standards (SASs), Government Auditing Standards (Yellow Book) or examinations under Statements on Standards for Attestation Engagements (SSAEs) or audits of non-Securities and Exchange Commission issuers performed pursuant to the standards of the PCAOB are required to have a system review. A system review is designed to determine whether a firm’s quality control system policies and procedures for its accounting and auditing practice in effect for the peer review period are suitably designed and complied with to provide the firm with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects.
   In a system review, the reviewer analyzes and evaluates a CPA firm’s quality control policies and procedures in effect during the peer review period, through such techniques as interviewing firm personnel and examining administrative files. To evaluate the effectiveness of the quality control system and the degree of compliance with the system, the reviewer will test a reasonable cross section of the firm’s engagements, with a focus on high-risk engagements.
2. An engagement review is for firms that are not required to have (and have not voluntarily requested) a system review. The objective of an engagement review is to evaluate whether engagements are performed and reported on in conformity with applicable professional standards in all material respects. An engagement review consists of reading the financial statements or information submitted by the reviewed firm and the accompanying accountant’s report, together with certain background information and representations and applicable documentation required by professional standards.
   
   This type of review does not cover the firm’s system of quality control, so the reviewer may not and does not express any assurance on the firm’s compliance with its own quality control policies and procedures or compliance with AICPA quality control standards.

Notice requirement and enrollment in an acceptable peer review program:
The SED regulations, among other things, require firms that become subject to the MQR law in 2012 (and later) to file a notice within 30 days of such change in status. In addition, if there has been a change in the firm’s ownership during the prior 12 months of the annual reporting period, a Form COAC must be attached to a Form CPA 6RA.

SED access to your firm’s peer review documents:
Pursuant to AICPA Facilitated State Board Access (FSBA) rules and procedures and the MQR law provisions, effective for reviews accepted on or after January 1, 2012, the firm’s peer review report, the acceptance letter, letter of response and letter(s) signed by the reviewed firm accepting the peer review documents, with the understanding that the firm agrees to take certain required actions, will be made available to the SED via a secure website within 30 days of the review’s acceptance date. Finally, when applicable, the Peer Review Committee letter notifying the reviewed firm that certain required actions have been completed will be made available to the SED within 30 days of the date of the Peer Review Committee letter. [For convenience, all documents described in the preceding sentences that will be made available to the SED are hereinafter referred to as peer review documents.]

Enrollment in a peer review program:
A firm should submit to the NYSSCPA a “Peer Review Program Enrollment Form,” available at nysscpa.org/pdfs/peerreviewform.pdf. By enrolling, a firm agrees to have a peer review of its accounting and auditing practice once every three years.

1. A “Peer Review Program Enrollment Form” will be emailed to your firm.
2. The completed enrollment form should then be returned to the NYSSCPA by fax: 1-888-250-3285, or email: peerreview@nysscpa.org.
3. Once enrolled in the peer review program, the firm will be emailed an enrollment letter informing them of their admittance to the program and the due date for their peer review. They will also receive an invoice with their annual administrative fee. This has to be paid before the review is scheduled.
• a. Six months prior to the due date, the firm will be sent scheduling information by email to schedule their peer review.

Quality review filing due date:
Filing due dates are determined based on when a firm first begins providing attest services and, in part, whether the firm has completed a peer review performed under AICPA standards and received an acceptance letter prior to January 1, 2012.

1. For any firm registered with SED and already enrolled in an acceptable quality review program prior to January 1, 2012: To be in compliance with the MQR law, these firms will need to provide the SED with a copy of their most recently accepted quality review report each time they reregister with the SED on or after January 1, 2012.
   
2. For any firm that is registered with the SED as of January 1, 2012, and that is subject to the MQR requirements but has not enrolled in an acceptable quality review program as of January 1, 2012: These firms will need to enroll in an acceptable quality review program by January 31, 2012. Such firms will have 18 months from the first month in 2012 in which they first provide attest services to have a completed and accepted quality review.
3. For any firm that is registered with the SED, but does not begin performing attest services that trigger the MQR requirements until some date after January 1, 2012: These firms must notify the SED of their change in status relative to the MQR requirement within 30 days of that change in status. The firm must enroll in an acceptable quality review program within one year of the date they provide the first attest service that triggers the MQR requirement. The firm’s first quality review report must be completed and accepted within 18 months from the month in which that first attest service was provided.
4. For any firm that registers with the SED for the first time after January 1, 2012 and that is subject to the MQR requirements at the time of that registration: Such a firm will need to enroll in an acceptable quality review program within one year of registering with the SED. The firm’s first quality review report must be completed and accepted within 18 months from the month in which the firm’s first attest service as a registered firm was provided.

Important notice to readers:
Readers are encouraged to read the law, regulations and other guidance provided by the SED before making a final determination of their status (including, among other things, the due dates described in the preceding section for notice to the SED, enrollment in the Program and acceptance of the peer review) for purposes of the new law. Finally, while the MQR provisions of the accountancy reform law become effective on January 1, 2012, readers should be aware that the changes to the Competency Rules of the Board of Regents became effective July 26, 2009, for CPAs licensed prior to that date, and that for CPAs licensed on or after July 26, 2009, the competency rules are effective on January 1, 2011.

The aforementioned legislative and regulatory changes are available at the websites listed below or by contacting any member of the NYSSCPA Peer Review staff. We encourage your feedback and welcome comments on the matters discussed in this document: http://www.op.nysed.gov/prof/cpa/cpalaw.htm.

DISCLAIMER:
This primer on the New York State Mandatory Quality Review program (referred to herein as either the “Mandatory Quality Review law” or simply the “law”) is based on our review and understanding of 1) the accountancy reform law amendments to Article 149 of the education laws of New York and 2) the amendments to the Rules of the Board of Regents and the Regulations of the Commissioner of Education Relating to the Definition of Unprofessional Conduct and Licensure and Practice Requirements for Certified Public Accountants. The discussion in this primer is for your reference only and does not constitute an authoritative interpretation of the law and the corresponding rules and regulations. For authoritative opinions on the rules, laws and regulations discussed above, please consult the New York State Education Department Office of the Professions.

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