PEER REVIEW

BY CS KP DUTT

WHAT IS PEER REVIEWWHAT IS PEER REVIEW “Peer” means a person of similar standing

(one’s equals). “Review” means general survey or assessment of a subject or thing. “Peer Review” means review of work done by a professional, by another professional of similar standing.

Peer review is a process of self-regulation by a profession or a process of evaluation involving qualified individuals within the relevant field.

Peer review methods are employed to maintain standards, improve performance and provide credibility.

Some people call it “Auditing the Auditors.”

NEED FOR PEER REVIEWNEED FOR PEER REVIEW Expectation of service Receiver to receive quality service Gap between minimum quality of service and actual service

rendered. Reassuring stakeholders & society at large that the

profession is conscious of its responsibilities and strives its best to ensure that highest standards are observed by all practising members rendering “secretarial audit” & “attestation” services to corporates.

Peer Review process is an endeavor to enhance quality of services rendered by members of ICSI in practice as it helps in: Maintenance and enhancement of quality of attestation

services provided by members Assisting members in identifying areas of improvement

and receiving guidance from peer members Sharing of good practices/experience and mutual

learning among peer members

Global Scenario-Public Global Scenario-Public Accountancy Accountancy

• Started 1930 in France.• Independent Regulator in certain countries.• Existence in most of the developed Countries- About 50.

• In some countries disciplinary action if deficiency in services of Auditor is found.

• In US, public accountancy firms are required to enrol in an approved Practice Monitoring Programme in order to be admitted to or retain membership in AICPA (professional body in the US). Further, under Sec 104 of the Sarbanes-Oxley Act, 2002 they are additionally liable to be inspected by PCAOB (Public Companies Accounting Oversight Board), to assess the degree to which each firm and associated persons comply with the Act, PCAOB and SEC rules, professional & reporting standards.

Global Scenario- UKGlobal Scenario- UK Audit Inspection Unit (AIU), part of Professional

Oversight Board (POB), is responsible for monitoring of audits of all listed and other major public interest entities. AIU was set up following Government’s post-Enron review of the regulation of the UK accountancy profession which reported in January 2003. Review team’s report recommended enhancing monitoring of audits of listed and other major public interest entities through a new independent inspection unit (AIU) reporting to POB within an integrated independent regulator (FRC).

Professional accountancy bodies continue to register firms to conduct audit work with their regulatory activities being overseen by the POB. Audit registration committees of accountancy bodies receive formal reports from AIU on its monitoring work, with POB overseeing action taken by them in response to AIU’s recommendations. The Companies (Audit, Investigations and Community Enterprises) Act 2004 implemented statutory changes necessary to give effect to these arrangements.

INDIAINDIA • ICAI Statement on Peer Review was released in 2002 which lays

down the framework for conduct of Peer reviews by setting up Peer Review Board in April 2002 which is operational from 01. 04.2003.

• Peer Review mechanism covers all Practice Units or Chartered Accountants Firms / Members Practicing in Individual name in three stages with different types of practice units being included at each stage.

• Peer Review is a mechanism to proactively pursue, upgrade and maintain audit quality standards in India.

• It aims to maintains and enhance quality of attestation services and to enhance quality of professional work and has no relationship whatsoever with any disciplinary or any other regulatory mechanism .

• Major differences between India and some developed countries– In some other countries, findings of peer review can lead

to disciplinary proceedings but not in India– However, in India, system of peer review is intended to be

educative and is aimed at enhancing quality of attestation services rendered by members of Institute who are in public practice. Further, findings of peer review shall not result in any disciplinary proceedings against any member

PEER REVIEW AND QUALITY REVIEW DIFFERENCEPEER REVIEW AND QUALITY REVIEW DIFFERENCE

PEER REVIEW BOARD QUALITY REVIEW BOARD (QRB)•Supervisor within ICSI.•Constituted by the Council.• Consist of maximum 7 members.•Peer Reviewers are Individual Members of Institute

• Covers only members in practice.• Only Attestation services.•No disciplinary action even if there is deficiency in service.

•Constituted by Central Govt. Consist of Chairperson & 4 other members to be appointed from amongst persons of eminence in law, economics, business, finance, accountancy. 2 members to be nominated by Council & other 2 members by Central Govt.• Covers all members in practice & employment•Covers all services provided by members both attestation & non attestation.•Disciplinary action if there is a deficiency in service.• Member guilty of professional misconduct, if he doesn’t supply information called or doesn’t comply with requirements asked by QRB.

ICSI PEER REVIEW - A TOOL FOR ICSI PEER REVIEW - A TOOL FOR PROFESSIONAL EXECLLENCEPROFESSIONAL EXECLLENCE

• The Council of ICSI issued “Guidelines for Peer Review of Attestation Services by Practising Company Secretaries” vide notification dated 17.10.2011.

• Applicable from 1.10. 2011• Main objective is to ensure that in carrying out

their “attestation services” and professional assignments, the PCS-– complies with the Technical Standards laid

down by the Institute & – have in place proper systems (including

documentation systems) for maintaining the quality of the attestation services work they perform.

ICSI Peer ReviewICSI Peer Review• Means examination & review of systems, procedures & practices to

determine whether they have been put in place by the practice unit for ensuring the quality of attestation services as envisaged and implied/ mandated by the “Technical Standards” & whether these were effective or not during the period under review

• Directed towards maintenance as well as enhancement of quality of attestation services,

• Through review of attestation services engagement records, peer review identifies areas where a member may require guidance in improving the quality of his performance, provides guidance to members to improve-their performance and adhere to Technical Standards and various statutory/regulatory requirements.

• Advantages of Peer Review to Practice Unit:– enhance the quality of attestation services/professional

competence.– provides reassurance that the systems and procedures followed by

him match the desired standards of the Institute– adds value to its image and enhance credibility in the eyes of

corporate sector and provide competitive advantage.– provide a forum for Guidance and knowledge sharing

Important DefinitionsImportant Definitions• Practice Unit means members in practice, whether

practicing individually or as firm. • Attestation Services means services involving

secretarial audit issuing of various certificates, but excluding:– Management consulting Engagement;– Representing a client before the Authorities;– Testifying as expert witness; &– Providing expert opinion on points of principle,

such as secretarial standards or the applicability of certain laws, on the basis of facts provided by the client,

• The phrase ‘Attestation Services’ is used in guidelines interchangeably with secretarial or compliance audit Services, Attestation Functions & secretarial audit functions.

Important Definitions… contd…..Important Definitions… contd…..

• Technical Standards means & include:– Secretarial Standards issued by ICSI, wherever

mandatory;– Guidance Notes on Secretarial Standards issued

by ICSI;– Compliance of the Guidance Notes issued by

ICSI;– Notifications/Directions issued by the Council of

ICSI;– Compliance of the provisions of various relevant

Statutes and/or Regulations, which are applicable in the context of specific engagements being reviewed

PEER REVIEW BOARDPEER REVIEW BOARD

• Established by the Council. • To consist of maximum 7 members to be

appointed by the Council, of whom at least 4 to be from amongst Members of the Council.

• Balance members shall be from amongst prominent members of high integrity and reputation, including but not limited to former public officials, regulatory authorities etc.

• At least one-half of Council Members on the Board shall hold Certificate of Practice.

DUTIES OF PEER REVIEW BOARDDUTIES OF PEER REVIEW BOARD• Call for information from practice units;• Maintain a panel of Reviewers;• Define terms of appointment of reviewers;• To send Panel of at least 3 reviewers to practice unit &

allow practice unit to choose any one reviewer from panel;• To examine aspects of basis of selection of records

pertaining to attestation services in terms of Technical Standards;

• Arrange training programs for reviewers;• Prescribe the system, practice & procedure to be observed

in relation to peer reviews; • On considering report of reviewer to issue

recommendations to Practice unit and/or to order further peer review;

• After considering report of reviewer & compliance of recommendations by Practice Unit, to issue Peer Review Certificate.

• To guide members on best practices

REVIEWER MEANING AND REVIEWER MEANING AND QUALIFICATIONQUALIFICATION

• Reviewer means any member of ICSI engaged to carry out peer review of practice unit from panel of reviewers.

• Qualification of Reviewer: He shall:-– Be a member;– Possess at least 10 years experience; &– Be currently in practice as Company Secretary in

Practice.• He shall submit preliminary/interim/final report to Peer

Review Board.• Peer Reviewer shall maintain strict secrecy and

confidentiality while carrying out Peer Review and file a confidentiality statement before commencement of Peer Review. Breach of these conditions may lead to Professional Misconduct under CS Act, 1980.

• Peer Review Board may examine quality of report of reviewer & shall have powers to remove him from panel of reviewers in case quality of review/report fails to match desired standards.

Scope, Focus & Framework

• Directed at attestation services of practice unit.• Once practice unit is selected for review, its attestation

engagement records pertaining to immediately preceding financial year to be subjected to review. (Except records prior to 1.04.2004)

• Focuses on:– Compliance with Technical Standards;– Quality of Reporting;– Office systems & procedures with regard to compliance of

attestation services systems & procedures;– Training Programs for staff (including apprentices)

concerned with attestation functions, including appropriate infrastructure.

• Where practice unit is not adhering to Technical Standards, suggestions & recommendations for improvement may be made, & possibly followed by further review.

• Methodological approach involves 3 stages viz. planning, execution & reporting.

PEER REVIEW PROCESSPEER REVIEW PROCESS• Selection of an individual PCS or a firm of PCS by Peer Review

Board for conduct of Peer Review• Appointment of a Peer Reviewer from among panel of reviewer

consisting of ICSI members having requisite qualifications• Review and examination of quality of attestation services

provided by Practice Unit by a Peer Reviewer in order to determine whether– it has complied with Technical Standards and various other

statutory and regulatory requirements in the performance of attestation services

– Systems, procedures and practices have been put in place and these were effective or not during the period under review to ensure the quality of attestation services rendered

• Submission of Final report by the peer reviewer to the Peer Review Board

• Issue of Peer Review Certificate to the practice Unit.

Practice areas covered under the scope Practice areas covered under the scope of Peer Reviewof Peer Review

• Signing of Annual Return pursuant to Section 161(1) of the Companies Act, 1956

• Issue of Compliance Certificate pursuant to Section 383A(1) of the Companies Act, 1956

• Issue of certificate of Securities Transfers in compliance with the Listing Agreement with Stock Exchanges

• Certificate of reconciliation of Capital as per SEBI Circular dated Dec. 31, 2002

• Conduct of Internal Audit of Operations of Depository Participants

• Certification under Clause 49 of Listing Agreement

Compliance/Obligations of Practice Unit(P.U.)Compliance/Obligations of Practice Unit(P.U.)

• Should comply with these guidelines and in case of failure, it will be required to undergo appropriate review of its quality controls by the Board as per specific directions of Council.

• Obligations:-– Produce to reviewer access to any record or document

specified or any other record or document in his possession or control within reasonable time;

– Provide him explanation or further particulars in respect of anything produced above;

– Provide him all assistance in connection with peer review;– Where any information or matter relevant is recorded

otherwise than in a legible form, provide to him reproduction of such information or matter, in a legible form, with a suitable translation in English if it is in any other language;

– Ensure that he is given access to all documents relevant to his review no matter which office of the practice unit these documents may be available;

– Allow him to inspect, examine or take abstract or extract from a record or document or copy.

Periodicity, Cost, Training and DevelopmentPeriodicity, Cost, Training and Development• Will be implemented on the basis of random selections from

practice units or on request of practice unit. It may be done: – If company requests the Board for conduct of peer review of

its secretarial auditor (practice unit) at the cost of company

– If Council/Government/regulatory body requests Board for conduct of peer review of any Practice Units (Cost borne by practice unit)

• It should be mandatorily carried out at least once in a block of 5 years. However, if Board so decides or at request of practice unit, can be conducted at shorter intervals.

• Cost of Peer Review for reviewer & his qualified assistant to be decided by the Board & borne by Practice unit. In case reviewer has to conduct second review, same rate would apply to second review also. Each branch/ office under review would be considered separately.

• Adequate training facilities shall be provided to Reviewer & other persons who assist Board in the manner considered appropriate by Board.

• Reviewers shall be fully familiar with all procedures, prescriptions, guidelines & other decisions issued by the Board.

Other Significant Other Significant FeaturesFeatures

• Existence of “Chinese Wall” between the Peer Review Process and Disciplinary Proceedings- in the event of any deficiency noticed by the Peer Reviewer in attestation services provides/policies of the P.U. no disciplinary proceeding shall be initiated under the CS Act, 1980 against the P.U.

• Immunity from Liability- P.U. not to be liable for violation of code of conduct under CS Act, 1980 for making available records to the Peer Reviewer

• Dispute Resolution Mechanism- in the event of any dispute between the P.U. and the Reviewer on any matter relating to Peer Review they may refer the dispute in writing to the Board within 2 months and the Board shall decide within 6 months

SOME FAQs ON PEER REVIEW-ICAI and ICSISOME FAQs ON PEER REVIEW-ICAI and ICSI• ICAI• Significant objective of peer review is not to find out deficiencies

but to improve quality of services rendered by the members. Its objective is not to identify isolated cases of engagement failure, but to identify weaknesses that are pervasive and chronic in nature.

• Peer reviewer, cannot, under any circumstances, communicate with or visit the client(s) of the PU.

• Reviewer may have access to, or take abstracts of records and documents maintained by the PU in order to carry out the review work at PU's office, but in order to ensure the confidentiality of contents of client's file with the PU, the Reviewer shall not make copies or extracts of any document from the client's files reviewed by him, or of any client records acquired by him while conducting peer review, as part of his working papers, or otherwise.

• Reviewer may decline the assignment in case of conflict of interest between the Reviewer and the PU, after informing the Board and stating reasons and also due to ill health or pre-occupation.

• ICSI• P.U. shall pay to the Peer Reviewer the fee of Rs. 10,000/- (inclusive

of TA/DA and any out of pocket expenses) as may be prescribed by Board to get itself peer reviewed.

SOME FAQs ON PEER REVIEW-ICAI and ICSISOME FAQs ON PEER REVIEW-ICAI and ICSI• Only the fact of being Peer Reviewed can be stated on the website of

P.U. However, neither the Certificate nor the Peer Review Report may be given on website.

• If P. U. is Peer Reviewed & it is found that it have not maintained adequate records it will not be liable for any disciplinary action.

• Peer Review is only a broad examination of the systems and procedures followed by the Practice Unit. The fact that P.U. have been Peer Reviewed does not provide immunity from Disciplinary Action. However, neither Institute nor the Reviewer can file any complaint in respect of deficiencies observed during the course of Peer Review.

• The reviewer, by virtue of carrying out the peer review shall not incur any liability other than the liability arising out of his own conduct under the Code of Conduct under the Company Secretaries Act, 1980 and Regulations framed thereunder as well as under the relevant clauses of these Guidelines.

• If P.U. is not satisfied with the Report of the Peer Reviewer it may refer your case to the Peer Review Board.

• If P.U. is selected for Peer Review it is mandatory for it to offer itself for Peer Review. Any refusal shall be a misconduct under the Code of Conduct.

• P.U. may appeal against the Order of the Peer Review Board to the Central Council of the Institute.

• P.U. need not disclose the records of its clients to the reviewers.

SEBI ON PEER REVIEWSEBI ON PEER REVIEW

• SEBI in Jan 2009 ordered review of working papers of auditors relating to financial statements of companies constituting NSE-Nifty 50 & BSE Sensex-30 by peers, chosen from panel of specialist auditors nominated by SEBI. This decision was taken in wake of Satyam Scandal & to prevent such scam.

• Exercise taken up for third quarter results & for audited results for FY 2007-2008.

• Mr. Anil Ambani said such step would give confidence to global investors & significantly add to establishing quality of financial reporting in the country.

• According to experts “it was a good step but it would be difficult to rule out such incidents completely as there are some areas where promoters have some discretion. Even the existing checks and balances are also not less,"

• SOURCE :ECONOMIC TIMES JANUARY, 25, 2009

LISTING AGREEMENT AND IPOLISTING AGREEMENT AND IPO• Insertion of Clause 41(1) (h) to Listing Agreement –

Requirement of a valid peer review certificate for statutory auditors

• SEBI vide circular 05.04.2010 amended equity listing agreement: “Limited review/audit reports submitted to stock exchanges

annually or quarterly should only be given by those auditors who have subjected themselves to peer review process of ICAI & who holds a valid certificate issued by ‘Peer Review Board’ of ICAI.”

• This is applicable to all financial statements submitted by listed companies to stock exchanges after appointment of auditors for accounting periods commencing on or after 01.04.2010.

• As per SEBI (ICDR) Regulations, 2009; Financial information specified in Red Herring Prospectus (of issuer, group companies, changes in accounting policies, management discussion & analysis of financial conditions & results of operations) shall be certified by only those auditors who have subjected themselves to peer review process of ICAI & hold a valid certificate issued by ‘Peer Review Board’ of ICAI.

Should India have its Public Accounting Should India have its Public Accounting Oversight Board like the USOversight Board like the US

• Naresh Chandra Committee 2002 took note of Statement on Peer Review issued by ICAI in March, 2002. According to statement, ICAI has decided to aid professional firms in their quest for enhancement of quality of work through peer review, & have recognised that a professional should be always ready to show quality of his work.

• However, Committee, after deliberation, concluded that while statement is indeed a good one, it was time to think of a more independent and refined arrangement to ensure the quality of attestation services assignments performed by CAs in relation to technical standards prescribed for them.

Naresh Chandra Committee 2002Naresh Chandra Committee 2002• Committee was against creating public oversight board.• Committee considered two major steps. First, recommending

legislative and organizational support for setting up of independent Quality Review Boards to strengthen and reform peer review system within ICAI. Secondly, recommending significantly enhanced & expeditious disciplinary action within the framework of CA Act, 1949 to bring errant auditors to book .

• Independent Quality Review Boards: Committee said while ICAI’s Peer Review Statement seems to be an adequate, self-contained document that addresses most of issues regarding ‘who audits the auditors’, it is still necessary to recommend a process of quality review that is publicly perceived to be independent and expeditious. It recommends setting up of independent QRBs — one each for ICAI, ICSI and ICWAI.

• QRB INSERTED IN CS ACT, 1980 BY AMDENDMENT ACT OF 2006, CHAPTER VIIA FROM SECTION 29 A TO 29D.

CII TASK FORCE REPORT ON CORPORATE CII TASK FORCE REPORT ON CORPORATE GOVERNANCE BY NARESH CHANDRA 2009GOVERNANCE BY NARESH CHANDRA 2009

• GIVEN IN NOVEMBER 2009 THE REPORT SAID:• “However, the ICAI QRB has not achieved the

objectives for which it was established and the Task Force, thus considered it imperative that the QRB is made functional going forward to ensure quality in the audit process by a critical review of the intensity and integrity of auditors by peer auditors on an annual basis.”

• Recommendation: Audit Oversight Mechanism

– In interest of investors, general public & auditors, Task Force recommends that Government should intervene to strengthen ICAI Quality Review Board and facilitate its functioning of ensuring the quality of the audit process through an oversight mechanism on the lines of Public Company Accounting Oversight Board (PCAOB) in the United States.

Need for independent regulatorNeed for independent regulator• Suggestion of SEBI:

– SEBI has called Finance Ministry for creation of an independent regulator to oversee auditors.

– SEBI told finance ministry that lack of a strong regulatory framework for auditors compromises efficient functioning of stock markets.

– As per SEBI there was a conflict of interest in multiple roles being performed by Institutes from being an industry body to being a regulator for entire profession.

– Institutes may conduct peer reviews of firms but has no mandate for inspection of firms like PCAOB IN USA;

– Companies Bill, 2011 prposes to set up National Financial Reporting Authority a super regulator to oversees the activities of three Instittues.

– SEBI is a member of International Organization of Securities Commissions (IOSCO) an association of bodies that regulate world's securities & futures markets. The IOSCO had formulated 8 new principles in June 2010 to ensure that systemic risks were reduced & markets functioned fairly, efficiently & transparently

• (SOURCE: ECONOMIC TIMES DATED DECEMBER 06, 2011)

THANK YOU

Disclaimer Clause: Views expressed in this presentation views of the author do not necessary reflect those of the Institute.