RULE PROPOSALS

VOLUME 41, ISSUE 16

ISSUE DATE: AUGUST 17, 2009

LAW AND PUBLIC SAFETY

DIVISION OF CONSUMER AFFAIRS

NEW JERSEY STATE BOARD OF ACCOUNTANCY

Proposed Repeals and New Rules: N.J.A.C. 13:29-5.1 through 5.5, 5.7 and 5.8
Proposed New Rule: N.J.A.C. 13:29-5.6
Proposed Amendment: N.J.A.C. 13:29-5.6

Peer Review Program Rules

Authorized By: New Jersey State Board of Accountancy, William Mandeville, Executive Director.

Authority: N.J.S.A. 45:2B-48 and 45:2B-67.

Calendar Reference: See Summary below for explanation of exception to calendar requirement.

Proposal Number: PRN 2009-247.

Submit comments by October 16, 2009 to:

William Mandeville, Executive Director

New Jersey State Board of Accountancy

124 Halsey Street

P.O. Box 45000

Newark, New Jersey 07101

The agency proposal follows:

Summary

The New Jersey State Board of Accountancy (the Board) is proposing the creation of a new program to replace the Quality Enhancement Program pursuant to the authority set forth at N.J.S.A. 45:2B-67 of the Accountancy Act of 1997. The new program, to be known as the Peer Review Program, will replace the Board's existing Quality Enhancement Program, rules for which are currently set forth at N.J.A.C. 13:29-5. The Board believes that the current Quality Enhancement Program, which the Board instituted over a decade ago, is no longer adequate to protect the needs of the accounting profession and the consumers they serve. The current program, which requires a committee of the Board to review and evaluate audits, reviews, compilations and other reports issued by firms registered with the Board in order to determine whether the reports comply with accepted accounting and auditing standards, is no longer an effective mechanism to ensure the quality of accounting and/or auditing services performed by firms. The Board lacks the administrative resources to perform the level of reviews necessary to identify firms with inadequate systems of quality control, to detect performances that depart from professional practice standards and to impose corrective action. The Board, therefore, is proposing to repeal the existing rules in N.J.A.C. 13:29-5, with the exception of N.J.A.C. 13:29-5.6, which provides for the confidentiality of documents submitted to the Board during the review process. N.J.A.C. 13:29-5.6 is proposed to be recodified as N.J.A.C. 13:29-5.9 with a technical amendment to remove the current cross reference to N.J.A.C. 13:29-5.4, which is being repealed.

The new Peer Review Program, to be codified at N.J.A.C. 13:29-5, will require reviews to be conducted by qualified sponsoring organizations utilizing uniform peer review standards promulgated by the American Institute of Certified Public Accountants (AICPA) or by the Public Company Accounting Oversight Board (PCAOB). The Board believes that the new Peer Review Program will strengthen firms' quality control practices and will encourage firms to improve processes and correct shortcomings by effectively monitoring compliance with applicable accounting and auditing standards adopted by generally recognized standard-setting bodies. As a result, the Board believes that the new Peer Review Program will enhance the quality of the accounting profession in the State for the protection of New Jersey consumers.

The following is a summary of the proposed new rules for the Peer Review Program. N.J.A.C. 13:29-5.1 sets forth the purpose and scope of the Peer Review Program and the new rules. N.J.A.C. 13:29-5.1 provides that the purpose of the Peer Review Program is to improve the quality of financial reporting and to promote the fairness of presentation and the dependability of information on which the public relies for guidance in financial transactions, accounting and business performance. As was the case with the Quality Enhancement Program, the emphasis of the Peer Review Program is education and rehabilitation rather than disciplinary action. The Board will recommend or require appropriate educational programs or remedial procedures where reporting does not comply with appropriate professional standards. However, when a licensee is unwilling or unable to comply with those standards, or a licensee's professional work is so inadequate as to warrant disciplinary action, the Board will take appropriate action to protect the public interest. N.J.A.C. 13:29-5.1 also provides that the Peer Review Program will not require any licensee or firm to become a member of any sponsoring organization.

Proposed new rule N.J.A.C. 13:29-5.2 contains definitions for the terms "firm," "review or review program," "review year," "sponsoring organization" and "special reports," as those terms are used throughout Subchapter 5.

N.J.A.C. 13:29-5.3 sets forth standards for peer reviews and sponsoring organizations. The Board is proposing to adopt the "Standards for Performing and Reporting on Peer Reviews" promulgated by the AICPA, as its minimum standards for firm reviews. For firms that audit public companies, the Board is proposing to adopt the firm inspection standards of the PCAOB as its minimum standards for firm reviews. These standards are incorporated by reference, as amended and supplemented, in N.J.A.C. 13:29-5.3. N.J.A.C. 13:29-5.3 also delineates the sponsoring organizations that are approved to conduct peer reviews for New Jersey firms. Those organizations are: the Center for Public Company Audit Firms (CPCAF) (previously known as SEC Practice Section (SECPS)); the AICPA Peer Review Program; the New Jersey Society of Certified Public Accountants (NJSCPA) or other state CPA societies fully involved in the administration of the AICPA Peer Review Program; the National Conference of CPA Practitioners (NCCPAP); and the PCAOB. N.J.A.C. 13:29-5.3 also provides that other entities that utilize standards substantially similar to the standards utilized by the referenced organizations and that are approved by the Board pursuant to proposed new rule N.J.A.C. 13:29-5.8, discussed below, may conduct peer reviews.

N.J.A.C. 13:29-5.4 sets forth enrollment and participation requirements. N.J.A.C. 13:29-5.4 requires a firm licensed with the Board to participate in the Peer Review Program if the firm performs any attest service or any accounting and/or auditing engagements, including audits, reviews, compilations, forecasts, projections or special reports. Firms that issue only compilations where no report is required under the Statements on Standards for Accounting and Review Services will not be required to participate in the program. Such firms must submit a written request to the Board, on an annual basis, for an exemption from the Peer Review Program. However, if a firm that has been granted an exemption begins providing any attest service or any accounting and/or auditing engagements, the firm must notify the Board of this change in status within 30 days and must provide the Board with Peer Review Program enrollment information within 12 months of the date the services were first provided.

Proposed new rule N.J.A.C. 13:29-5.4 further requires a firm that performs any attest service or any accounting and/or auditing engagement to enroll in the peer review program of an approved sponsoring organization within one year from the date that the firm was initially licensed, or within one year from the date the firm begins to perform those services. The firm must schedule and begin an additional review within three years of the previous review's due date, or earlier, if so required by the sponsoring organization. If a firm has been rejected by a sponsoring organization, the firm must enroll in the peer review program of another sponsoring organization and must notify the Board of the firm's enrollment in the new program within 30 days. A firm choosing to change sponsoring organizations may do so only if the firm authorizes the previous sponsoring organization to communicate to the succeeding sponsoring organization any outstanding corrective actions related to the firm's most recent review. Any outstanding actions must be cleared and any outstanding fees paid prior to transfer between sponsoring organizations. The firm must also notify the Board of its enrollment in the new program within 30 days.

[page=3019] N.J.A.C. 13:29-5.4 also provides that an out-of-State firm permitted to practice in New Jersey pursuant to N.J.S.A. 45:2B-54 and 50.1 of the Accountancy Act must comply with the peer review program of the state in which the firm is licensed. If the out-of-State firm is licensed in a state that does not require peer review, the out-of-State firm must comply with the Board's peer review program requirements. An out-of-State firm practicing in New Jersey must submit peer review documentation to the Board upon request.

N.J.A.C. 13:29-5.5 details the effect of successive substandard peer reviews. A firm that receives two consecutive review ratings of "pass with deficiencies" or "fail," in a system or engagement review, or any combination thereof, must have an accelerated review within 18 months of the firm's last review. If the accelerated review results in a review rating of pass with deficiencies or fail, the Board will review the finding to determine whether the firm should be precluded from performing any other attest service or accounting and/or auditing engagement for a period of three years, or until given permission by the Board. Upon review of the accelerated review results, the Board may also permit the firm to complete attest engagements for which field work has already begun, provided that, prior to the issuance of any report, the engagement is reviewed and approved before it is issued by a third-party reviewer acceptable to the sponsoring organization, and the engagement is completed within 30 days of the acceptance of the peer review report and the letter of response by the firm.

N.J.A.C. 13:29-5.6 sets forth a firm's peer review reporting requirements. If the firm receives a peer review rating of "pass," the firm must submit a copy of the peer review report to the Board. If the firm receives a peer review rating of "pass with deficiencies" or "fail," the firm must submit a copy of the report and the firm's letter of response. Firms participating in the PCAOB inspection program must submit a copy of any final report resulting from such inspection, together with documentation of any significant issues and findings and the firm's response. All documents must be filed with the Board within 30 days of receipt. Firms are also required to complete the Board's Peer Review Compliance Reporting Form, which must be filed within 30 days of receipt of final acceptance of the review by the sponsoring organization.

N.J.A.C. 13:29-5.7 establishes the Peer Review Oversight Committee of the Board. The purpose of this Committee is to assist the Board in the administration of the new Peer Review Program. The Committee will be responsible for monitoring sponsoring organizations in order to provide reasonable assurance that peer reviews are being conducted and reported on in accordance with peer review minimum standards. N.J.A.C. 13:29-5.7 provides that information concerning a specific firm or reviewer obtained by the Committee during oversight activities will be kept confidential, except as provided under New Jersey's Open Public Records Act. The Committee will consist of at least five members, all of whom must be holders of active New Jersey accounting licenses. All Committee members must be certified public accountants, public accountants or registered municipal accountants. At least two Committee members must also be current members of the Board. The Committee will be responsible for making an annual recommendation to the Board as to the continuing qualifications of approved sponsoring organizations.

N.J.A.C. 13:29-5.8 establishes procedures that a sponsoring organization seeking Board approval must comply with. An entity seeking to become an approved sponsoring organization must submit a peer review administration plan to the Board for review. The plan must demonstrate that the organization can communicate to firms participating in the peer review program the latest developments in peer review standards and the most common findings in the peer reviews conducted by the organization. The plan must also establish procedures with respect to resolving any disagreements that may arise out of the performance of a peer review and with respect to evaluating the performance of each reviewer for compliance with AICPA standards.

As noted above, recodified rule N.J.A.C. 13:29-5.9 continues to provide for the confidentiality of peer review documents submitted to the Board. Any documents submitted in accordance with the proposed new rules must have deleted the name of the client, the client's address and other identifying factors, provided that the deletion does not render the type or nature of the entity or organization undeterminable. The rule continues to provide that the identities of persons or entities who submit financial statements and reports to the Board, other than the licensees who issued the reports, shall be preserved in confidence unless expressly ordered by the Board.

The Board has provided a 60-day comment period for this notice of proposal. Therefore, this notice is excepted from the rulemaking calendar requirement pursuant to N.J.A.C. 1:30-3.3(a)5.

Social Impact

The Board believes that the new Peer Review Program and the proposed new rules in Subchapter 5 will have a positive impact upon the accounting profession in New Jersey and on New Jersey consumers. The Board believes that the new Peer Review Program will provide an effective mechanism to monitor New Jersey firms' compliance with applicable accounting and auditing standards. The Board believes that the proposed new rules will help to improve the quality of financial reporting and will promote the fairness of presentation and the dependability of information on which the public relies for guidance in financial transactions, accounting and business performance. The Board believes that recodified rule N.J.A.C. 13:29-5.9 will continue to have a positive impact upon New Jersey consumers by continuing to safeguard the confidentiality of client information contained in documents submitted to the Board as part of the peer review process.

Economic Impact

The new Peer Review Program and the proposed new rules in Subchapter 5 may have an economic impact upon the licensed accounting firms that utilize the Board's current Quality Enhancement Program for purposes of peer review. Such firms may incur costs associated with enrolling in a qualifying sponsoring organization's peer review program. The Board believes that the costs that may be borne by these firms will be outweighed by the benefits that the new Peer Review Program will provide. The Board believes that peer reviews conducted by the qualifying sponsoring organizations delineated in the new rules will strengthen firms' quality control practices. Participation in the new Peer Review Program will encourage firms to improve processes and correct shortcomings by providing firms an effective mechanism by which to monitor compliance with applicable accounting and auditing standards.

Federal Standards Statement

A Federal standards analysis is not required because the proposed new rules and recodified rule N.J.A.C. 13:29-5.9 are governed by N.J.S.A. 45:2B-42 et seq., and are not subject to any Federal requirements or standards.

Jobs Impact

The Board does not believe that the proposed new rules and recodified rule N.J.A.C. 13:29-5.9 will result in the creation or the loss of jobs in the State.

Agriculture Industry Impact

The Board does not believe that the proposed new rules and recodified rule N.J.A.C. 13:29-5.9 will have any impact on the agriculture industry of the State.

Regulatory Flexibility Analysis

Currently, the Board licenses approximately 20,000 accountants and 900 accounting firms. If Board licensees are considered "small businesses" within the meaning of the Regulatory Flexibility Act, N.J.S.A. 52:14B-16 et seq., then the following analysis applies.

The proposed new rules and recodified rule N.J.A.C. 13:29-5.9 will impose various reporting, recordkeeping and compliance requirements on accounting firms. These requirements are discussed in the Summary above.

A licensed accounting firm that performs attest services or accounting and/or auditing engagements, as delineated in the proposed new rules, will be required to retain the professional services of a qualified sponsoring organization to conduct a peer review. The costs of compliance with the proposed new rules are discussed in the Economic Impact above. The Board believes that the proposed new rules and recodified rule N.J.A.C. 13:29-5.9 should be uniformly applied to all accounting firms in the State that perform any attest service or any accounting and/or auditing engagements, in order to ensure that such services are being provided consistent with professional practice [page=3020] standards. Therefore, no differing compliance requirements for accounting firms engaging in these services are provided based on the size of the business.

Smart Growth Impact Statement

The Board does not believe that the proposed new rules and recodified rule N.J.A.C. 13:29-5.9 will have any impact upon the achievement of smart growth or upon the implementation of the State Development and Redevelopment Plan.

Housing Affordability Impact

The proposed new rules and recodified rule N.J.A.C. 13:29-5.9 will have an insignificant impact on affordable housing in New Jersey and there is an extreme unlikelihood that the rules would evoke a change in the average costs associated with housing because the rules concern accounting practice.

Smart Growth Development Impact

The proposed new rules and recodified rule N.J.A.C. 13:29-5.9 will have an insignificant impact on smart growth and there is an extreme unlikelihood that the rules would evoke a change in housing production in Planning Areas 1 or 2 or within designated centers under the State Development and Redevelopment Plan in New Jersey because the rules concern accounting practice.

Full text of the rules proposed for repeal may found in the New Jersey Administrative Code at N.J.A.C. 13:29-5.1 through 5.5, 5.7 and 5.8.

Full text of the proposal follows (additions indicated in boldface thus; deletions indicated in brackets [thus]):

SUBCHAPTER 5. [QUALITY ENHANCEMENT] PEER REVIEW PROGRAM

13:29-5.1 Purpose and scope

(a) Pursuant to N.J.S.A. 45:2B-67, the Board establishes a Peer Review Program (Program) to monitor licensee compliance with applicable accounting and auditing standards adopted by generally recognized standard-setting bodies. The purpose of the Program is to improve the quality of financial reporting and to promote the fairness of presentation and the dependability of information on which the public relies for guidance in financial transactions, accounting and business performance. The Program shall emphasize education and rehabilitation rather than disciplinary action. Appropriate educational programs or remedial procedures shall be recommended or required where reporting does not comply with appropriate professional standards. However, when a licensee is unwilling or unable to comply with those standards, or a licensee's professional work is so inadequate as to warrant disciplinary action, the Board shall take appropriate action to protect the public interest.

(b) The rules in this subchapter shall not require any licensee or firm to become a member of any sponsoring organization.

13:29-5.2 Definitions

The following words and terms, when used in this subchapter, shall have the following meanings unless the context clearly indicates otherwise:

"Firm" means a sole proprietorship, a professional corporation, a partnership, a limited liability company, a limited liability partnership or any other lawful form of business organization.

"Review or review program" means the review conducted under the Peer Review Program.

"Review year" means the one-year (12-month) period covered by the review. Engagements selected for review normally would have periods ending during the year under review.

"Special reports" means reports issued under professional standards in connection with the following: specified elements, accounts, or items of a financial statement; compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements; financial presentations to comply with contractual agreements or regulatory provisions; financial information presented in prescribed forms or schedules that require a prescribed form of auditor's reports; or internal audits by a firm for a client or a governmental entity.

"Sponsoring organization" means an entity approved by the Board, pursuant to N.J.A.C. 13:29-5.3 or 5.8, to administer the review.

13:29-5.3 Standards for peer reviews and sponsoring organizations

(a) The Board adopts the 2009 "Standards for Performing and Reporting on Peer Reviews" promulgated by the American Institute of Certified Public Accountants (AICPA), as its minimum standards for review of firms. The Standards are incorporated in this subchapter by reference, as amended and supplemented, and may be found at the AICPA website, www.aicpa.org, specifically, http://www.aicpa.org/download/practmon/2009_stds.pdf. For public company audit firms, the Board adopts the firm inspection standards of the Public Company Accounting Oversight Board (PCAOB), as its minimum standards for review of firms. The inspection standards are incorporated in this subchapter by reference, as amended and supplemented, and may be found at the PCAOB website, www.pcaob.org specifically, http://www.pcaobus.org/Standards/index.aspx.

(b) Qualified sponsoring organizations shall be: the Center for Public Company Audit Firms (CPCAF) (previously known as SEC Practice Section (SECPS)); the American Institute of Certified Public Accountants (AICPA) Peer Review Program; the New Jersey Society of Certified Public Accountants (NJSCPA) or other state CPA societies fully involved in the administration of the AICPA Peer Review Program; the National Conference of CPA Practitioners (NCCPAP); the Public Company Accounting Oversight Board (PCAOB); and such other entities that utilize substantially similar standards and that are approved by the Board pursuant to N.J.A.C. 13:29-5.8.

13:29 -5.4 Enrollment and participation; exemptions

(a) Participation in the Peer Review Program is required of each firm licensed with the Board that performs any attest service or any accounting and/or auditing engagements, including audits, reviews, compilations, forecasts, projections or special reports. A firm that issues only compilations where no report is required under the Statements on Standards for Accounting and Review Services is not required to participate in the program.

(b) A firm that does not perform services as set out in (a) above shall annually submit a request for an exemption from the Program in writing to the Board with an explanation of the services offered by the firm. A firm with an exemption that begins providing services set out in (a) above shall notify the Board of the change in status within 30 days and provide the Board with enrollment information within 12 months of the date the services were first provided. The firm shall have a review within 18 months of the date the services were first provided.

(c) Each firm required to participate under (a) above shall enroll in the Peer Review Program of an approved sponsoring organization within one year from its initial licensing date or the performance of services that require a review, whichever is earlier. The firm shall adopt the review due date assigned by the sponsoring organization, and shall notify the Board of the date within 30 days of its assignment. The firm shall schedule and begin an additional review within three years of the previous review's due date, or earlier as may be required by the sponsoring organization. It is the responsibility of the firm to anticipate its needs for review services in sufficient time to enable the reviewer to complete the review by the assigned review due date.

(d) In the event that a firm is merged, otherwise combined, dissolved, or separated, the sponsoring organization shall determine which firm is considered the succeeding firm. The succeeding firm shall retain its peer review status and the review due date.

(e) The Board shall accept extensions granted by the sponsoring organization to complete a review, provided the Board is notified by the firm within 20 days of the date that an extension is granted.

(f) A firm that has been rejected by a sponsoring organization for whatever reason shall enroll in a program of another sponsoring [page=3021] organization. The firm shall notify the Board of the firm's enrollment in the new program within 30 days of the date of enrollment.

(g) A firm choosing to change to another sponsoring organization may do so provided that the firm authorizes the previous sponsoring organization to communicate to the succeeding sponsoring organization any outstanding corrective actions related to the firm's most recent review. Any outstanding actions shall be cleared and outstanding fees paid prior to transfer between sponsoring organizations. The firm shall notify the Board of the firm's enrollment in the new program within 30 days of the date of enrollment.

(h) An out-of-State firm practicing in this State pursuant to N.J.S.A. 45:2B-54 and 50.1 shall comply with the peer review program of the state in which the firm is licensed. If the out-of-State firm is licensed in a state that does not require peer review, the out-of-State firm shall comply with the peer review program requirements set forth in this subchapter. All out-of-State firms registered to practice in this State pursuant to N.J.S.A. 45:2B-50.1 and 54 shall submit peer review documentation upon request of the Board.

13:29-5.5 Effect of successive substandard reviews

(a) A firm, including a succeeding firm, that receives two consecutive review ratings of pass with deficiencies or fail in a system or engagement review or any combination thereof shall have an accelerated review within 18 months of the firm's last review.

(b) If an accelerated review results in a review rating of pass with deficiencies or fail, the Board shall conduct a review to determine whether the firm:

1. May complete attest engagements for which field work has already begun. The firm may complete attest engagements for which field work has already begun only if:

i. Prior to issuance of any report, the engagement is reviewed and approved before it is issued by a third-party reviewer acceptable to the sponsoring organization; and

ii. The engagement is completed within 30 days of the acceptance of the peer review report and the letter of response by the firm; or

2. Shall not perform any other attest service, including any accounting and/or auditing engagements, audits, reviews, compilations (as well as compilations where no report is required), forecasts, projections or other special reports for a period of three years or until given permission by the Board, whichever is sooner.

13:29-5.6 Reporting to the Board

(a) A firm shall submit to the Board the following peer review documents:

1. A copy of the report if the firm received a peer review rating of pass;

2. A copy of the report and letter of response if the firm received a peer review rating of pass with deficiencies or fail; and

3. A copy of any final report resulting from any inspection by the PCAOB firm inspection program together with documentation of any significant issues and findings and the firm's response.

(b) Any report or document required to be submitted pursuant to (a) above shall be filed with the Board within 30 days of receipt of the final report or document.

(c) The reviewed firm shall complete the Board's Peer Review Compliance Reporting Form. The firm shall file the form with the Board within 30 days of receipt of final acceptance of the review by the sponsoring organization.

13:29-5.7 Peer Review Oversight Committee

(a) The Board shall annually appoint a standing committee to be known as the Peer Review Oversight Committee (the Committee) to assist the Board in the administration of the Peer Review Program. The Committee shall be responsible for the following:

1. Monitoring sponsoring organizations to provide reasonable assurance that peer reviews are being conducted and reported on in accordance with peer review minimum standards;

2. Reviewing the policies and procedures of sponsoring organization applicants as to their conformity with the peer review minimum standards; and

3. Reporting to the Board on the conclusions and recommendations reached as a result of performing the functions set forth in (a)1 and 2 above.

(b) Information concerning a specific firm or reviewer obtained by the Committee during oversight activities shall be confidential, except as provided under the Open Public Records Act, N.J.S.A. 47:1A-1 et seq.

(c) The Committee shall consist of no fewer than five members, all of whom shall be holders of active licenses issued under N.J.S.A. 45:2B-42 et seq. All Committee members shall be licensed certified public accountants, licensed public accountants or registered municipal accountants. At least two Committee members shall also be current members of the Board.

(d) The Committee shall make an annual recommendation to the Board as to the continuing qualifications of a sponsoring organization as an approved sponsoring organization.

13:29-5.8 Procedures for a sponsoring organization

(a) To qualify as a sponsoring organization, an entity shall submit a peer review administration plan to the Board for review and approval. The plan of administration shall:

1. Establish a program to communicate to firms participating in the peer review program the latest developments in peer review standards and the most common finding in the peer reviews conducted by the sponsoring organization;

2. Establish procedures for resolving any disagreement that may arise out of the performance of a peer review;

3. Establish procedures, including conducting hearings, to resolve matters that may lead to the dismissal of a firm from the peer review program;

4. Establish procedures, including the conducting of hearings, to evaluate and document the performance of each reviewer for compliance with AICPA standards that may lead to the disqualification of a reviewer who does not meet the standards;

5. Require the maintenance of records of peer reviews conducted under the program in accordance with the records retention rules of the AICPA; and

6. Provide for periodic reports to the Board on the results of the peer review program.

13:29 -[5.6]5.9 Confidentiality

(a) Any documents submitted in accordance with [N.J.A.C. 13:29-5.4] the rules in this subchapter shall have deleted the name of the client, the client's address and other identifying factors, provided that the deletion does not render the type or nature of the entity or organization undeterminable.

For example, the client name, address, or Federal identification number shall be deleted, but reference to the type of entity or organization, such as financial institution, school district or hospital shall be indicated.

(b) (No change.)