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P. S. Kumar

P. S. Kumar on how peer review is to be executed

PEER review (PR) process involves three stages: i) planning, ii) execution and iii) reporting. The planning process is summarised in Chart 1.

Execution

An initial meeting will be held in order to ascertain the accuracy of responses given in the questionnaire. In case of large practice units (PUs) that have extensively documented procedures, it is enough if reference is made to the appropriate sections in the questionnaire since the reviewer can examine the PUs' manuals rather than go through the responses given in the questionnaire.

The reviewer will carry out a compliance review of general controls in order to satisfy himself as to the degree of reliance he can place on them. While the Statement on Peer Review specifies the general controls, it does not lay down the benchmarks.

The five general key controls are: i) independence, ii) maintenance of professional skill and standards, iii) outside consultation, iv) staff supervision and development, and v) office administration.

The independence of practising chartered accountants has been held to be a state of mind all along. However, in the current situation, independence may have to be amply demonstrated to a reviewer. One benchmark could be the percentage of fees from a single client or a client-group, not exceeding specified limits in relation to the overall revenue. Another could be the annual rating of clients in terms of acceptability as a client.

Maintenance of professional skills and standards will be seen in the light of a PU's ability to perform a task as expected of it. The need to possess a set of skills that is relevant is more keenly felt than before while, at the same time, the ability to possess it is decreasing. For instance, audit in a computerised environment is almost impossible without the assistance of EDP-trained personnel. Except in the very large firms, employment of such personnel on a full-time basis is not feasible from the point of view of economics as well as high staff turnover. In such cases, the PUs could share resources with other PUs on a long-term basis. Also, it stands to reason that if a PU has several partners, each of them acquires specialist skills in varied fields. There is certainly no requirement that a PU should have in-house capability in several fields or specialists in diverse areas. All that is required is that the PU should have the relevant skills for the work undertaken by it.

Outside consultation is one area where most PUs would have felt the need for one time or another. For instance, revaluation of assets requires an engineer's certification and computation of gratuity and insurance accounting require actuarial assistance, areas auditors are not familiar with. Even in fields that are within the knowledge-horizon of PUs, such as income- tax and corporate laws, specialist assistance may be required in certain situations such as evaluating a contingent liability. A PU's ability to recognise such situations is under assessment here.

Staff supervision and development is an area in which most PUs would be actively engaged in the administration of practice. However, there should be a formal structure for training, grading and rating the staff, as also counselling when required.

Office administration assumes importance in terms of support functions. Services such as proper filing, ensuring that adequate staff are available, record-keeping, and so on, are of utmost importance for a PU to ensure it is run well.

The reviewer will decide on the number of attestation service engagements to be reviewed keeping in mind the size of the PU in terms of the number of attestation services engagements involved, and on the reliance placed on the general controls. The reviewer has the option to increase or decrease the sample depending on the comfort level. The reviewer will select a sample that is balanced, with an across-the-broad spectrum of practice, so that the sample is a reliable one.

As far as the review of attestation service engagement records is concerned, the reviewer may adopt a compliance or substantive approach or a combination of both. To form an opinion as to the reliability of the compliance approach, the reviewer will assess the following six key controls: i) review and evaluation of internal control systems, ii) substantive tests, iii) financial statements preparation, iv) audit conclusions, v) audit report; and vi) audit record administration.

Where the reviewer is not satisfied with the PU's internal procedures and documentation, the reviewer will have no choice but to employ the substantive approach, that is, a greater examination of attestation records. Where the PU has sound procedures and systems, the review can be completed in one working day. However, in the absence of such systems, requiring the reviewer to spend more time, the Statement provides for a maximum of seven working days for the review.

Reporting

Reporting by the reviewer involves several steps with checks and balances being built into it so that a PU is given adequate opportunities to take corrective action as the review is being carried on. The procedure for reporting by the reviewer and the ultimate issuance of a PR certificate may require further refining in certain aspects. For instance, the Statement assumes that in every case, the reviewer will, during his review, notice some deficiency or the other, requiring the reviewer to issue a preliminary report to the PU to which the PU will have to reply in 21 days. Paragraph 16 takes into account a situation where the review may be completed in one working day and, therefore, the assumption is misplaced. The Statement should consider the possibility that the PU may have very good internal systems and has complied with all the technical standards, in which case it should be entitled to be issued a PR certificate immediately. Further, the Statement, in paragraph 16.2(3)(ii)(b), requires a reviewer to "on being satisfied, submit a report to the Board". The exact import of this is not very clear since the Statement goes on to state that the Board may make further recommendations as per the procedure.

The Statement speaks of a final report. It is not very clear whether this is a separate report or whether the reports submitted by the reviewers after the re-reviews are considered the final report. This discussion assumes the reports submitted by the reviewers as final.

The Statement also provides for dispute resolutions and for maintenance of confidentiality on the part of the reviewer. However, the following issues need to be addressed:

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